The past six months have been a windfall for Kimball Electronics’s shareholders. The company’s stock price has jumped 48.6%, hitting $28.59 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now the time to buy Kimball Electronics, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free for active Edge members.

Why Do We Think Kimball Electronics Will Underperform?

Despite the momentum, we don't have much confidence in Kimball Electronics. Here are three reasons we avoid KE and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

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 3.9% compounded annual growth rate over the last five years. This fell short of our benchmark for the industrials sector.

2. EPS Trending Down

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Sadly for Kimball Electronics, its EPS declined by 2.4% annually over the last five years while its revenue grew by 3.9%. This tells us the company became less profitable on a per-share basis as it expanded.

3. Breakeven Free Cash Flow Limits Reinvestment Potential

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and 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.

Final Judgment

Kimball Electronics doesn’t pass our quality test. Following the recent rally, the stock trades at 22.5× forward P/E (or $28.59 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. We’d recommend looking at the Amazon and PayPal of Latin America.

Stocks We Would Buy Instead of Kimball Electronics

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