Knowles Stock: Patient Investors Could Be Rewarded with Contrarian IoT Play

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Knowles to Benefit from IoT Growth

Arguably the top areas for growth are artificial intelligence and the “Internet of Things” (IoT), as the applications pick up in just about everything people do on a daily basis.

An intriguing high-risk/high-reward investment in the advanced communications technology space is small-cap Knowles Corp (NYSE:KN), which is down 11.7% over the past month and offers investors a decent entry point.

Knowles Corp is not a new kid on the block, having been around for over seven decades. The company develops niche communications products, including audio processing, micro-acoustic, and precision device solutions.

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What makes the technology interesting from an investment viewpoint is that it will benefit from the rise of advanced voice-enabled devices, including those in mobile and IoT applications. Think about the increasing role of voice in autonomous vehicles.

Knowles sells to original equipment manufacturers in the mobile consumer electronics, communications, medical, military, aerospace, and industrial industries.

On the chart, KN stock is currently searching for support. If Knowles stock can hold, we could see a rally and breakout to the $20.00 level:

Chart courtesy of www.StockCharts.com

The Contrarian Situation with KN Stock

A look at the revenue history of Knowles shows the contrarian situation, as the revenue trend was negative from 2014 to 2017, with sequential declines in each year.

Year Revenue ($ Billions)
2013 $1,210
2014 $1,140
2015 $849.6
2016 $755.7
2017 $744.2

(Source: “Knowles Corp.,” MarketWatch, last accessed October 4, 2018.)

My bullish view is that the tailwinds in the IoT and mobile segments for advanced voice technologies could provide the catalyst for Knowles stock.

There are some encouraging signs of growth, with Knowles Corp expected to finally halt its revenue decline and increase revenues by 6.89% to $795.46 million in 2018, followed by 6.1% to $844.22 million in 2019. (Source: “Knowles Corporation (KN),” Yahoo! Finance, last accessed October 4, 2018.)

Knowles has managed to control its cost side amid the declining revenues. The company generated positive earnings before interest, tax, depreciation, and amortization (EBITDA) in five straight years and at a higher growth rate versus revenues during the same time frame.

Year EBITDA ($ Millions) Growth
2013 $291.03
2014 $128.1 -56%
2015 $127.2 -0.7%
2016 $124.8 -1.9%
2017 $125.8 0.8%

(Source: MarketWatch, last accessed October 4, 2018, op cit.)

The earnings picture has been mixed for KN stock, but the company reported an adjusted $0.88 per diluted share in 2017.

For this year, Knowles is estimated to report flat earnings of $0.89 per diluted share, but come back with a consensus $1.04 and a high $1.20 per diluted share in 2019 for an attractive forward multiple of 13 times and a price/earnings to growth ratio of just 1.16. (Source: Yahoo! Finance, last accessed October 4, 2018, op cit.)

In another positive sign, Knowles produced positive free cash flow, but will need to drive growth. The move to higher revenues should help.

Year Free Cash Flow ($ Millions)
2013 $69.01
2014 $31.6
2015 $15.3
2016 $68.8
2017 $41.3

(Source: MarketWatch, last accessed October 4, 2018, op cit.)

Analyst Take

Knowles Corp could be ripe for a rally, given the expected improvements in several key metrics.

Moreover, KN stock is receiving strong buying from the insiders, which is bullish. Over the past six months, a net 284,498 common shares of Knowles stock were added. (Source: Yahoo! Finance, last accessed October 4, 2018, op cit.)