Key Takeaways
- Innovative Medtech and Specialty Audio solutions, and facility consolidation, are set to enhance revenue and margins, driving future growth.
- Strong cash generation supports potential M&A and share buybacks, positively impacting earnings per share.
- Operational inefficiencies, pricing pressures, and external economic factors pose risks to Knowles' revenue and profitability, particularly impacting margin consistency across segments.
Catalysts
About Knowles- 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 expecting another year of revenue and EPS growth in 2025 due to new innovative custom solutions in the Medtech and Specialty Audio segment, which are projected to enhance revenue growth.
- The consolidation of facilities for specialty film capacitors is expected to improve margins, eventually driving revenue growth as production challenges are resolved and demand for specialty products increases.
- The company has received a significant order of over $75 million from a new customer in the energy sector, with shipments scheduled for 2026, indicating future revenue growth opportunities.
- Precision Devices segment is experiencing strong demand, particularly in medical and defense markets, leading to anticipated revenue growth as orders accelerate.
- The company's robust cash generation and strong balance sheet enable potential strategic M&A opportunities and share buybacks, which could positively impact earnings per share.
Knowles Future Earnings and Revenue Growth
Assumptions
How have these above catalysts been quantified?- 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 March 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 61.0x today. This future PE is lower than the current PE for the US Electronic industry at 20.4x.
- 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 7.75%, as per the Simply Wall St company report.
Knowles Future Earnings Per Share Growth
Risks
What could happen that would invalidate this narrative?- Challenges in plant consolidation and the ramping up of new products in the specialty film capacitor line resulted in shipment issues, which could have a negative impact on revenue and earnings if not resolved promptly.
- Pricing pressure, particularly on mature products in the Medtech and Specialty Audio segments, could compress gross margins and impact overall profitability.
- The ongoing delays and inefficiencies in the production of specialty film products could lead to higher costs and lower margins, impacting net earnings if the issues are not resolved within the expected timeline.
- Exposure to tariffs, albeit minimal at 5% of revenue, could still impose unforeseen costs if trade tensions escalate, potentially affecting net margins.
- Economic dependency on the industrial end markets and distribution business, where slowing demand or excess inventory at partners could result in fluctuating revenue streams and impact earnings consistency.
Valuation
How have all the factors above been brought together to estimate a fair value?- 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 7.7%.
- Given the current share price of $16.27, the analyst price target of $21.5 is 24.3% 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.
How well do narratives help inform your perspective?
Disclaimer
Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.