Over the past six months, Knowles has been a great trade, beating the S&P 500 by 18.9%. Its stock price has climbed to $34.77, representing a healthy 30.6% increase. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Knowles, or should you be careful about including it in 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?
Despite the momentum, we’re passing on Knowles for now. Here are three reasons we avoid KN, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Knowles’s demand was weak and its revenue declined by 5.7% per year. This was below our standards and signals it’s a low quality business.
2. Fewer Distribution Channels Limit Its Ceiling
With $635 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. EPS Growth Has Stalled
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Knowles’s flat EPS over the last five years was weak. On the bright side, this performance was better than its 5.7% annualized revenue declines.
Final Judgment
We see the value of companies helping their customers, but in the case of Knowles, we’re out. With its shares topping the market in recent months, the stock trades at 23.2× forward P/E (or $34.77 per share). At this valuation, there’s a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at a top digital advertising platform riding the creator economy.
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