The past six months have been a windfall for Kimball Electronics’s shareholders. The company’s stock price has jumped 97.2%, hitting $29.25 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Kimball Electronics, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.
Why Do We Think Kimball Electronics Will Underperform?
Despite the momentum, we're sitting this one out for now. Here are three reasons you should be careful with KE and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Kimball Electronics’s sales grew at a sluggish 4.4% compounded annual growth rate over the last five years. This was below our standard for the industrials sector.
2. Low Gross Margin Reveals Weak Structural Profitability
All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.
Kimball Electronics has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 8.1% gross margin over the last five years. Said differently, Kimball Electronics had to pay a chunky $91.87 to its suppliers for every $100 in revenue. 
3. EPS Growth Has Stalled
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.
Kimball Electronics’s flat EPS over the last five years was below its 4.4% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Kimball Electronics, we’ll be cheering from the sidelines. After the recent rally, the stock trades at 23.3× forward P/E (or $29.25 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are more exciting stocks to buy at the moment. We’d recommend looking at the Amazon and PayPal of Latin America.
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