Kimball Electronics Inc: Upside Breakout for EMS Play & More to Come

Kimball Electronics Breaks From Multiyear Resistance

The global economic renewal is driving up the demand for electronic goods, which we’re seeing with the current chip shortage.

To play the expected demand, consider Kimball Electronics Inc (NASDAQ:KE), a global electronics manufacturing services (EMS) company. It provides contract engineering, manufacturing, and supply chain services to the automotive, medical, industrial, and public safety end markets.

We’ve been seeing pent-up demand for electronic goods from consumers who are flush with cash.

As seen in the following chart, Kimball stock recently broke above a multi-year resistance level that was in place since the stock’s debut in November 2014.

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The breakout is technically significant and suggests additional gains for KE stock. Moreover, Kimball stock is down by 26% from its March high, opening up an opportunity to consider the stock on the price weakness.

Chart courtesy of StockCharts.com

Record Revenues Support KE Stock Bull Case

A look at Kimball Electronics Inc’s five-year revenue picture shows the company increasing its revenues in four consecutive years, including breaking the $1.0-billion threshold in 2018 to a record level in 2020 amid the COVID-19 pandemic.

The compound annual growth rate (CAGR) of 9.3% doesn’t immediately jump out at first glance, but it’s typical of the sector.

Fiscal YearRevenues Growth
2016$842.1 MillionN/A
2017$930.9 Million10.6%
2018$1.1 Billion15.2%
2019$1.2 Billion10.2%
2020$1.2 Billion1.6%

(Source: “Kimball Electronics, Inc.” MarketWatch, last accessed May 20, 2021.)

My bullish forecast for Kimball Electronics Inc is supported by what will likely be strong demand for EMS.

After the muted growth in 2020, Kimball is expected to increase its revenues by 6.8% to $1.3 billion in 2021, followed by 7.5% to $1.4 billion in 2022. (Source: “Kimball Electronics, Inc. (KE),” Yahoo! Finance, last accessed May 20, 2021.)

As its revenues ramped higher, the company reported positive earnings before interest, taxes, depreciation, and amortization (EBITDA), including growth in three of the last four years.

Fiscal YearEBITDA (Millions)Growth
2016$53.2N/A
2017$62.216.8%
2018$72.115.9%
2019$71.8-0.4%
2020$73.42.3%

(Source: MarketWatch, op. cit.)

Kimball Electronics Inc has also been generating generally accepted accounting principles (GAAP) and adjusted earnings-per-share (EPS) profits.

Fiscal YearGAAP Diluted EPSGrowth
2016$0.76N/A
2017$1.2463.2%
2018$0.62-50.0%
2019$1.2195.0%
2020$0.71-40.9%

(Source: MarketWatch, op. cit.)

Adjusting for non-operating items, Kimball Electronics Inc reported $1.10 per diluted share in 2020. This is expected to rise to $2.08 per diluted share in 2021, easing off to $1.86 per diluted share in 2022. (Source: Yahoo! Finance, op. cit.)

Kimball managed to generate positive free cash flow in four of the last five fiscal years, marking a five-year high in 2020.

Fiscal YearFree Cash Flow (Millions)Growth
2016$3.2N/A
2017$13.5326.1%
2018$14.36.1%
2019-$31.9-322.4%
2020$34.4208.0%

(Source: MarketWatch, op. cit.)

Analyst Take

The number of institutions owning Kimball stock has been rising. Currently, 203 institutions hold a 64% stake. (Source: Yahoo! Finance, op. cit.)

KE stock trades at attractive valuations. Based on the current price, Kimball Electronics Inc trades at 10.7 times its 2021 EPS estimate and a mere 0.40 times its 2021 revenue estimate.