Medtech And Specialty Audio Will Open New Opportunities

Key Takeaways

• Growth in medtech and specialty audio, with strong bookings and cash generation, positions Knowles for revenue growth and shareholder value enhancement.
  
• Production expansion, strategic acquisitions, and essential demand assurance bolster Knowles' revenue streams and net margins amidst market uncertainties.
  
• Tariff risks, production inefficiencies, recession vulnerabilities, and unfavorable customer mix threaten Knowles' future profitability and growth amid a challenging market environment.

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 anticipates strong year-over-year growth in its medtech and specialty audio segment, with innovations in data solutions and new opportunities in medical markets leading to increased revenue and revenue growth acceleration in the second quarter.
  
• The Precision Devices segment expects to ramp up its specialty film line for full production, which should incrementally improve shipments and yield significant revenue growth in the latter half of the year.
  
• Knowles' distribution orders and the normalization of inventory levels across capacitor products are contributing to strong bookings trends, which are expected to drive future revenue growth and improve earnings.
  
• The company plans to leverage its robust cash generation for potential acquisitions and share buybacks, actions that could increase earnings per share and enhance shareholder value.
  
• Despite tariff-related market uncertainties, the assurance of essential device demand in medtech and stability in defense programs position Knowles to maintain strong revenue streams and healthy net margins.

Knowles Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Knowles's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.3% today to 24.5% in 3 years time.
• Analysts expect earnings to reach $159.4 million (and earnings per share of $1.67) by about May 2028, up from $24.0 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 13.2x on those 2028 earnings, down from 58.4x today. This future PE is lower than the current PE for the US Electronic industry at 20.6x.
• Analysts expect the number of shares outstanding to decline by 2.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.65%, as per the Simply Wall St company report.

Knowles Future Earnings Per Share Growth

Risks

• The tariff situation remains fluid and poses a risk to Knowles' business despite currently minimal direct exposure, potentially impacting future revenues and profit margins if conditions change.
  
• Challenges in the specialty film line have led to production inefficiencies, which could negatively impact gross margins and overall profitability if not resolved in a timely manner.
  
• There is increased sensitivity in the industrial segment to recessions, which could negatively affect revenue and growth if the macroeconomic environment worsens.
  
• Potential impacts from unfavorable customer mix and absence of one-time benefits have already been seen in gross margins, suggesting future profitability may be at risk if these trends continue.
  
• Inorganic growth opportunities may be paused in the current market environment, potentially delaying strategic expansions or acquisitions that could boost future revenue and earnings growth.

Valuation

• The analysts have a consensus price target of $20.75 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 $16.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $650.1 million, earnings will come to $159.4 million, and it would be trading on a PE ratio of 13.2x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $15.98, the analyst price target of $20.75 is 23.0% 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.