Summary
- In Q2:FY23, which ended on Dec 31, 2022, KE reported record quarterly revenues of $436.7 million, an all-time high for the fourth consecutive quarter and up 39% year-over-year.
- The company forecasts solid revenue growth for the second half of fiscal 2023, driven by ramped-up production at its international subsidiaries.
- We reiterate our Buy rating, and raise our price target to $30.
Singular Research
Investment Thesis
Kimball Electronics ( KE ) takes pride in building long-term relationships with its customers and, in the last quarter, received the Circuits Assembly award for achieving excellent overall customer ratings.
KE near-shores its production close to the geographical location of its respective customers. The Company continued to ramp up production in its subsidiaries in Thailand, Mexico, and Poland.
KE’s capital expenditures are spent on supporting its geographic expansion, with a large portion earmarked for Mexico and Poland. Looking ahead, the Company plans to make a record investment of $80 to $100 million in capital expenditures in FY:23 to execute its geographic expansion strategy and to increase revenues.
Quarterly Summary - Q2:23
Revenue increased in all three of Kimball Electronics' verticals. All three verticals had revenue increases during the quarter compared to the same period last year.
Automotive. The Company generated $200.0 million, up 44% year-over-year, in the automotive market. KE’s automotive market made up 46% of overall revenue. One of the most important drivers for KE’s success in this market is the increase in electronic content per vehicle.
Medical. KE generated $124.7 million, up 39% year-over-year, in the medical market. The Company’s medical market was 29% of revenues. According to KE, one of its key demand drivers in the medical market are aging populations in many countries around the world.
Industrial. The Company generated $105.0 million, up 27% year-over-year, in the industrial market. KE’s industrial market represents 24% of overall revenue. One of the key drivers in the industrial market is KE’s established business relationships with climate control and smart metering vendors on multiple continents.
Transition to New CEO
The Company announced on January 10, 2023, that its current CEO and Chairman, Don Charron, will retire at the end of February. Richard Phillips, previously CEO at Elkay Manufacturing, will take over as CEO, and Robert Phillippy as non-executive Chairman.
Company Guidance
KE raised guidance for fiscal 2023. Management now expects revenues of $1.7 billion to $1.8 billion, an increase over the previous guidance of $1.6 to $1.7 billion, and up 26% to 33% year-over-year with sequential quarterly revenue increases in a stair-stepped fashion for the remainder of FY:23.
Risks
- Continued shortage of parts, especially computer chips.
- The possibility that the economic slowdown, in the U.S. and abroad, eventually catches up with the Company’s end markets of automotive, medical, and industrial, and, as a result, affects the Company’s revenues.
- The Company’s significant reliance on the automotive and medical verticals; a decline in these industries could adversely affect revenue and profitability.
Valuation
Based on management’s guidance, our FY:23 Estimates are for revenues to rise by 31.1% to $1,769.5 million and for FY:23 EPS to rise by 85.5% to $2.30. We believe these expectations to be conservative.
Kimball Electronics trades at 11.18 times our FY:23 EPS Estimate of $2.30. We value KE stock using a blended valuation methodology, where we blend 50% of KE’s price target using a relative P/E ratio and the other 50% using a DCF model.
In our P/E valuation, we forecast KE’s price-to-earnings ratio to converge to its peer group average. Given KE’s small size and growth expectations and the industries to which it is most exposed, we believe this forecast is conservative. This relative valuation gives us a price target of $25.68.
In our DCF model, we estimate the firm will earn a return on capital of 10%, reinvesting 20% of this return into their business and growing after-tax operations by 5% over the next seven years. We believe these assumptions are conservative, given KE’s significant growth opportunities. These assumptions lead to a DCF price target of $34.47.
We then equally blend the relative valuation target, $25.68, and the DCF valuation price target, $34.47, to produce a final target price of $30.08, which we round down to $30.00.
For further details see:
Kimball Electronics: New CEO, Record Revenue, Raises Guidance, Maintain Buy