Expanding Medtech, Industrial And Defense Applications Will Create New Opportunities

Key Takeaways

• Growth in medtech, industrial, and defense markets, combined with new product lines, is broadening the addressable market and driving resilient demand.
  
• Operational efficiency, custom solutions, and strong cash flow are enhancing margins, supporting earnings momentum, and enabling value-creating capital deployment.
  
• Margin pressures, slower growth prospects, operational inefficiencies, mature market risks, and potential M&A missteps all threaten long-term profitability and sustainable earnings.

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.

• Knowles is positioned to benefit from the expansion of applications in medtech, industrial, and defense sectors-areas experiencing increasing electrification and digitization-which is driving resilient demand and supporting organic revenue growth above historical rates.
  
• Strong and consistent bookings trends, coupled with a robust pipeline of new design wins, are expected to broaden Knowles' addressable market and drive revenue visibility over the next several quarters.
  
• The expansion of specialty film production and the launch of new product lines, such as inductors, are set to increase Knowles' total addressable market, providing incremental growth opportunities that should support revenue acceleration and potentially higher margins as these initiatives scale.
  
• Knowles' ongoing focus on delivering differentiated, custom-engineered solutions and scaling through operational efficiency is helping the company achieve higher factory utilization and margin improvement, positively impacting net margins and earnings.
  
• Share repurchases and strong cash flow generation enable additional value creation and optionality for strategic M&A, which could further accelerate earnings growth and provide support to EPS via reduced share count.

Knowles Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Knowles's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.8% today to 25.5% in 3 years time.
• Analysts expect earnings to reach $164.4 million (and earnings per share of $1.75) by about July 2028, up from $27.0 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 13.4x on those 2028 earnings, down from 66.3x today. This future PE is lower than the current PE for the US Electronic industry at 24.2x.
• Analysts expect the number of shares outstanding to decline by 2.83% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.91%, as per the Simply Wall St company report.

Knowles Future Earnings Per Share Growth

Risks

• The company's exposure to unfavorable product mix and higher factory costs is already pressuring gross margins (noted by a 280 bps YoY decrease in MedTech & Specialty Audio Q2 margins), and persistent challenges with factory inefficiencies or further product mix shifts could result in sustained margin compression, negatively impacting long-term net margins and earnings.
  
• The company's organic growth guidance remains in the 4–6% annual range, which is modest and below broader high-growth technology hardware averages; if design wins and new product expansions (specialty films, inductors) take longer to gain traction or underperform expectations, top-line revenue growth could stagnate or fall short of market expectations.
  
• Knowles is in the midst of ramping new product lines (e.g., specialty film, inductors) and expanding capacity, but the company is already experiencing higher scrap costs and production ramp inefficiencies; inability to resolve these issues swiftly or scale new lines profitably could erode gross margins and limit contribution to earnings.
  
• The business is heavily exposed to essential but mature markets (medtech hearing health, defense, industrial), which, while insulated during downturns, are also slower-growing and could be at risk from secular technological shifts (such as system-level integration or commoditization in MEMS and capacitors), potentially resulting in longer-term revenue growth headwinds and loss of pricing power.
  
• There is a stated focus on disciplined M&A to drive growth, but if future acquisitions are not well-integrated or accretive, or if optionality from M&A fizzles due to macro or industry conditions, earnings could be diluted or incrementally burdened by restructuring costs, impacting both net margins and free cash flow.

Valuation

• The analysts have a consensus price target of $22.5 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 $18.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $645.7 million, earnings will come to $164.4 million, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $20.84, the analyst price target of $22.5 is 7.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.