Kimball Electronics (KE)

Global electronics contract manufacturer Kimball Electronics (NYSE:KE) announced better-than-expected revenue in Q1 CY2025, but sales fell by 11.9% year on year to $374.6 million. The company expects the full year’s revenue to be around $1.42 billion, close to analysts’ estimates. Its non-GAAP profit of $0.27 per share was 42.1% above analysts’ consensus estimates.

Company Overview

Founded in 1961, Kimball Electronics (NYSE:KE) is a global contract manufacturer specializing in electronics and manufacturing solutions for automotive, medical, and industrial markets.

Like many equipment and component manufacturers, electrical systems companies are buoyed by secular trends such as connectivity and industrial automation. More specific pockets of strong demand include Internet of Things (IoT) connectivity and the 5G telecom upgrade cycle, which can benefit companies whose cables and conduits fit those needs. But like the broader industrials sector, these companies are also at the whim of economic cycles. Interest rates, for example, can greatly impact projects that drive demand for these products.

Competitors of Kimball Electronics include Plexus Corp. (NASDAQ:PLXS), Benchmark Electronics, Inc. (NYSE:BHE), and Celestica Inc. (NYSE:CLS).

Examining a company’s long-term performance can provide clues about 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 4.5% compounded annual growth rate over the last five years. This was below our standard for the industrials sector and is a tough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Kimball Electronics’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 5% annually. Kimball Electronics isn’t alone in its struggles as the Electrical Systems industry experienced a cyclical downturn, with many similar businesses observing lower sales at this time.

This quarter, Kimball Electronics’s revenue fell by 11.9% year on year to $374.6 million but beat Wall Street’s estimates by 10.8%.

Looking ahead, sell-side analysts expect revenue to decline by 8.2% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and indicates its products and services will face some demand challenges.

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 $91.89 to its suppliers for every $100 in revenue.

This quarter, Kimball Electronics’s gross profit margin was 7.2%, in line with the same quarter last year. On a wider time horizon, Kimball Electronics’s full-year margin has been trending down over the past 12 months, decreasing by 1.4 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Kimball Electronics was profitable over the last five years but held back by its large cost base. Its average operating margin of 4.4% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.

Looking at the trend in its profitability, Kimball Electronics’s operating margin decreased by 1.1 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Kimball Electronics’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

This quarter, Kimball Electronics generated an operating profit margin of 3.1%, down 1 percentage points year on year. Since Kimball Electronics’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Kimball Electronics’s full-year EPS dropped 67.1%, or 13.7% annually, over the last four years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Kimball Electronics’s low margin of safety could leave its stock price susceptible to large downswings.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

Sadly for Kimball Electronics, its EPS declined by more than its revenue over the last two years, dropping 23%. This tells us the company struggled to adjust to shrinking demand.

Diving into the nuances of Kimball Electronics’s earnings can give us a better understanding of its performance. Kimball Electronics’s operating margin has declined by 2.4 percentage points over the last two years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, Kimball Electronics reported EPS at $0.27, down from $0.34 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Kimball Electronics’s full-year EPS of $1.11 to shrink by 3.4%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Kimball Electronics broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.

Taking a step back, an encouraging sign is that Kimball Electronics’s margin expanded by 5.7 percentage points during that time. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

Kimball Electronics’s free cash flow clocked in at $105.9 million in Q1, equivalent to a 28.3% margin. This result was good as its margin was 21.2 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Kimball Electronics historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 9.9%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Kimball Electronics’s ROIC averaged 2 percentage point decreases each year. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Kimball Electronics reported $51.38 million of cash and $178.3 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $65.36 million of EBITDA over the last 12 months, we view Kimball Electronics’s 1.9× net-debt-to-EBITDA ratio as safe. We also see its $16.62 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Kimball Electronics blew past analysts’ EPS expectations this quarter. We were also excited its revenue outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this was a good print with some key areas of upside. The stock traded up 3% to $15.17 immediately after reporting.

Updated: May 22, 2025 at 11:06 PM EDT

Are you wondering whether to buy Kimball Electronics or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

We see the value of companies helping their customers, but in the case of Kimball Electronics, we’re out. To begin with, its revenue growth was uninspiring over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its rising cash profitability gives it more optionality, the downside is its projected EPS for the next year is lacking. On top of that, its declining EPS over the last four years makes it a less attractive asset to the public markets.

Kimball Electronics’s P/E ratio based on the next 12 months is 16.4x. While this valuation is fair, the upside isn’t great compared to the potential downside. There are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $19.75 on the company (compared to the current share price of $17.27).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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