The past six months have been a windfall for Knowles’s shareholders. The company’s stock price has jumped 48.2%, setting a new 52-week high of $33.38 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Knowles, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Knowles Will Underperform?
We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons there are better opportunities than KN and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Knowles’s demand was weak and its revenue declined by 5.2% per year. This wasn’t a great result and is a sign of poor business quality.
2. Fewer Distribution Channels Limit its Ceiling
With $614.1 million in revenue over the past 12 months, Knowles is a small player in the business services space, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and numerous distribution channels.
3. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Knowles’s EPS grew at 5.2% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 5.2% annualized revenue declines and tells us management adapted its cost structure in response to a challenging demand environment.
Final Judgment
We see the value of companies helping their customers, but in the case of Knowles, we’re out. Following the recent rally, the stock trades at 23.4× forward P/E (or $33.38 per share). This valuation tells us a lot of optimism is priced in - you can find more timely opportunities elsewhere. We’d suggest looking at a dominant Aerospace business that has perfected its M&A strategy.
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