Knowles has had an impressive run over the past six months as its shares have beaten the S&P 500 by 15.6%. The stock now trades at $26.26, marking a 21.3% gain. 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? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Knowles Will Underperform?
We’re happy investors have made money, but we don't have much confidence in Knowles. Here are three reasons why KN doesn't excite us and a stock we'd rather own.
1. Revenue Spiraling Downwards
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Knowles’s demand was weak over the last five years as its sales fell at a 4.9% annual rate. This wasn’t a great result and signals it’s a low quality business.
2. Fewer Distribution Channels Limit its Ceiling
With $593.2 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. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
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, Knowles’s ROIC averaged 3.6 percentage point decreases each year. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Knowles doesn’t pass our quality test. With its shares beating the market recently, the stock trades at 22.3× forward P/E (or $26.26 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.
Stocks We Would Buy Instead of Knowles
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