Launching Respiratory Care Final Assembly Will Open New Opportunities

Key Takeaways

• Strategic focus on the Medical CMO and restructuring efforts aim to enhance revenue and lower costs, potentially improving margins through efficient operations.
  
• Increased liquidity and strong balance sheet support future investments and possible acquisitions, with relocation of production mitigating tariff impacts.
  
• Declining demand and operational challenges across key sectors threaten financial stability and delay growth, coupled with supply chain and tariff uncertainties impacting costs.

Catalysts

Engages in the provision of electronics manufacturing, engineering, and supply chain support services to customers in the automotive, medical, and industrial end markets.

• Kimball Electronics is strategically repositioning for growth by divesting noncore assets and increasing focus on the Medical CMO, which should enhance their revenue potential by capturing opportunities in an attractive market.
  
• The restructuring plan includes closing a facility to improve utilization, which is expected to lead to lower operational costs, potentially improving net margins.
  
• The company is leveraging its unique capability in high-level assemblies and finished medical devices, positioning itself for growth in revenue as new medical device programs, like the Respiratory Care Final Assembly, launch by late fiscal 2026.
  
• With a stronger balance sheet and lower debt levels, Kimball has increased liquidity and capacity for future investments, supporting potential increases in earnings through strategic growth initiatives and possible acquisitions.
  
• Tariffs on China, Mexico, and Canada may lead to the relocation of production to the U.S. or Thailand, potentially stabilizing revenue by mitigating tariffs and aligning production closer to end markets.

Kimball Electronics Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kimball Electronics's revenue will decrease by 9.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.5% today to 5.0% in 3 years time.
• Analysts expect earnings to reach $60.0 million (and earnings per share of $2.36) by about April 2028, up from $8.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, down from 41.3x today. This future PE is lower than the current PE for the US Electronic industry at 19.3x.
• Analysts expect the number of shares outstanding to decline by 1.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.78%, as per the Simply Wall St company report.

Kimball Electronics Future Earnings Per Share Growth

Risks

• Declining customer demand across all verticals, especially in the Medical and Industrial sectors, poses a significant risk to Kimball Electronics' future revenue growth.
  
• The company is experiencing a 13% year-over-year decline in net sales, which could negatively impact their earnings and long-term financial stability.
  
• Continued operational challenges in North America, with softened volumes and end-of-life production in its automotive segment, may negatively affect the company's net margins.
  
• Ongoing uncertainties related to tariffs and potential shifts in the supply chain, particularly concerning facilities in Mexico, could strain operational costs and further impact revenues.
  
• The integration and ramp-up of new programs, such as the Medical CMO focus and the new braking program in Romania, will take time, thus delaying the expected return to historical growth patterns, which may affect short to medium-term earnings projections.

Valuation

• The analysts have a consensus price target of $21.25 for Kimball Electronics based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $28.0, and the most bearish reporting a price target of just $14.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $60.0 million, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 8.8%.
• Given the current share price of $13.53, the analyst price target of $21.25 is 36.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.