Summary
- Kimball Electronics recently posted Q2 FY23 results with significant rise in the revenue and net income.
- Automobile, medical, and industrial segment revenue rose significantly.
- KE is still undervalued when compared to the industry standards with a lot of growth potential.
- I assign a buy rating on Kimball Electronics.
Investment Thesis
Kimball Electronics ( KE ) recently announced its Q2 FY23 results. Its revenue and income rose significantly, and the management has provided optimistic revenue guidance for upcoming quarters. In this report, I'll discuss the company's growth potential and analyze its quarterly results. I give KE stock a buy recommendation because I believe it is inexpensive in comparison to industry norms and presents a terrific investment opportunity.
About KE
KE provides a manufacturing solutions provider of electronics and also provides contract manufacturing services to customers in the medical, automotive, and public safety end markets. Their manufacturing services include supply chain services and support, design services and support, and qualification services. The manufacturing services also comprise reliability testing, production of printed circuit board assemblies, production of medical devices and disposables, cold chain, and software design services. They operate in countries like the United States, India, Mexico, Thailand, Poland, China, and Vietnam. It was founded in 1961 and is headquartered in Jasper, Indiana.
Financial Analysis
KE recently announced its Q2 FY23 results . They beat the market revenue estimate by 5.42% but missed the market EPS estimate by 6.38%. The reported net sales for Q2 FY23 were $436.6 million, an increase of 38.5% compared to the net sales of Q2 FY22. The growth in sales of automotive, medical, and industrial segments was the main driver of the gain. It's apparent that the company's revenue and net income increased in the second quarter of FY23 primarily due to these three segments' superior performance. In Q2 FY23, these three sectors were responsible for 99% of the company's overall sales. The automobile segment's net sales during the second quarter of FY23 were $200 million , up 44% over the same period in FY22. The sales of the medical segment for Q2 FY23 were $125 million, a rise of 39% compared to Q2 FY22. The sales of the industrial segment for the Q2 FY23 was $105 million, a rise of 27% compared to the Q2 FY22.
The reported net income for Q2 FY23 was $10.7 million, a significant increase of 109.6% compared to Q2 FY22. The diluted EPS for Q2 FY23 was $0.43, an increase of 115% compared to Q2 FY22. The financial performance of KE in Q2 FY23 was, in my perspective, quite excellent.
Technical Analysis
KE is trading at the level of $26. The stock has begun to go higher after a period of consolidation, and I believe it may soon reach its all-time high, which is at $30.5. It has twice tested the $30.5 barrier, but both times the stock fell after striking that level by about 35%. Therefore, the $30.5 level is very important, and one should keep an eye on it. If the stock breaks its all-time high, I think we will see new momentum, and it may even reach the level of $40 in a year. Since the business has reported strong quarterly earnings, I think the stock has the ability to hit $40, which would represent a good return of around 35% over the course of a year.
Should One Invest In KE Stock?
The management anticipates that FY23's net revenue will be around $1.75 billion, or 30.4% more than FY22's revenue. The management is continuing to ramp up production on both new and old programs, and they are growing their operations in Thailand and Mexico, which will increase sales; therefore, I think they will hit the revenue objective. In addition, they have a healthy revenue growth ((YOY)) of 27% and revenue three year CAGR of 8.14%, which shows their growth potential.
The shareholding pattern of KE looks decent. Institutions own 69.5% of the shares in the company, which is a positive sign. A company in which institutions own a majority of the stake is considered safe, and there is less volatility in share price fluctuations which is a good sign for investors.
KE has an A valuation grade by the Quant, and I agree with it. In my opinion, KE is still undervalued according to the valuation metrics. I'll discuss three key valuation indicators, which in my opinion, are among the best ratios for determining the value of a company. The first ratio is the P/E ratio. KE has a P/E ratio FWD of 11.81x compared to the sector P/E FWD ratio of 20.67x. The PEG ratio is the second ratio. For growth companies like KE PEG ratio is a better valuation metric as it takes future earnings and revenue growth into consideration. They have a PEG FWD ratio of 0.59x compared to the sector ratio of 1.66x. The third ratio is the Price / Sales ratio. A Price / Sales ratio below one is considered suitable for a company, and they have a Price / Sales ratio FWD of 0.37x compared to the sector ratio of 2.96x. After examining all three measures, I believe KE is undervalued, and it still has tremendous room for growth and the potential to provide sizable returns for its owners.
Risk
KE derives most of its revenue from operations outside the United States, mainly from India, China, Poland, Mexico, and Thailand. Their international operations are subject to various risks like global and local political and economic instability, health emergencies like covid-19 and foreign governments' measures taken in response to it, geopolitical disruption, changes in foreign policies, trade, and tariff barriers. These dangers may adversely affect the company's earnings and revenue, which may adversely affect its balance sheet. Few foreign countries put limits on the amount of cash that can be moved to the United States or charge fees for such transfers. To an extent, they have excess cash in foreign locations that can be used in operations in the United States.
Bottom Line
After analyzing all the parameters, I believe KE is still undervalued and has much growth potential. They have solid fundamentals and consistently increase their income and revenue each quarter, which is good news for investors. I believe the company can provide significant returns to its shareholders from current levels. Hence, I assign a buy rating on KE stock.
For further details see:
Kimball Electronics: Undervalued Stock With A Lot Of Growth Potential