Medtech And Specialty Audio Focus Will Drive Future Market Opportunities

Key Takeaways

• Streamlined operations and strategic focus on Medtech and Specialty Audio could enhance revenue and margins by focusing on high-growth sectors.
  
• Expansion through the Cornell acquisition and stock repurchase plan suggests improved revenue, margin growth, and shareholder value.
  
• Challenges in production and pricing pressures could impact Knowles' revenue, margins, and earnings amid inventory issues and tariff exposures.

Catalysts

Offers capacitors, radio frequency (RF) and microwave filters, balanced armature speakers, and medtech microphones in Asia, the United States, Europe, rest of Americas, and internationally.

• The sale of the Consumer MEMS microphone business has streamlined operations and focused resources on high-growth sectors like Medtech and Specialty Audio, which can positively impact Knowles' revenue and margins moving forward.
  
• Continued revenue and EPS growth are anticipated in 2025, driven by new custom solutions in the Medtech and Specialty Audio segments, which are leveraging fixed overheads to boost EBIT margins.
  
• The successful integration and expansion of the product portfolio through the Cornell acquisition, specifically in high-performance capacitors, is positioned to significantly improve revenue and margins by addressing new demand in medical and energy markets.
  
• A substantial $75 million order from a new customer in the energy sector, with significant shipments starting in 2026, indicates potential future revenue growth and operational scale in the Precision Device segment.
  
• The authorization of an additional $150 million in stock repurchase capacity suggests a strategic focus on increasing shareholder value, which could improve earnings per share (EPS) through reduced share count.

Knowles Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Knowles's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.2% today to 22.4% in 3 years time.
• Analysts expect earnings to reach $145.7 million (and earnings per share of $1.47) by about February 2028, up from $23.4 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 15.0x on those 2028 earnings, down from 65.9x today. This future PE is lower than the current PE for the US Electronic industry at 23.8x.
• Analysts expect the number of shares outstanding to decline by 2.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.76%, as per the Simply Wall St company report.

Knowles Future Earnings Per Share Growth

Risks

• Challenges in plant consolidation and delays in ramping production of new specialty film capacitor products could impact revenue growth and operational efficiency, affecting net margins and earnings.
  
• Pressure on pricing, particularly in the Medtech, Specialty Audio segment for mature products, could lead to lower gross margins and reduced profitability.
  
• Ongoing inventory reduction in the industrial distribution channel indicates potential sales slowdowns if inventory levels don't stabilize, impacting future revenues and cash flow.
  
• Exposure to tariffs on goods imported from China and Mexico, although limited, poses a risk to cost structures and could impact net margins.
  
• Delays in realizing the full potential of new product lines, such as specialty film capacitors, and dependencies on new customer orders may create uncertainty in revenue projections and impact earnings growth.

Valuation

• The analysts have a consensus price target of $21.5 for Knowles 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 $25.0, and the most bearish reporting a price target of just $17.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $650.2 million, earnings will come to $145.7 million, and it would be trading on a PE ratio of 15.0x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $17.58, the analyst price target of $21.5 is 18.2% 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.