Over the past six months, Kimball Electronics’s shares (currently trading at $19) have posted a disappointing 11.9% loss, well below the S&P 500’s 7.5% gain. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

Is there a buying opportunity in Kimball Electronics, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons why you should be careful with KE and a stock we'd rather own.

Why Do We Think Kimball Electronics Will Underperform?

Founded in 1961, Kimball Electronics (NYSE:KE) is a global contract manufacturer specializing in electronics and manufacturing solutions for automotive, medical, and industrial markets.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance signals its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Kimball Electronics’s 6.1% annualized revenue growth over the last five years was mediocre. 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.

Kimball Electronics’s full-year EPS dropped 35.8%, or 8% annually, over the last four years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Kimball Electronics’s low margin of safety could leave its stock price susceptible to large downswings.

3. Cash Burn Ignites Concerns

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.

While Kimball Electronics posted positive free cash flow this quarter, the broader story hasn’t been so clean. Kimball Electronics’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 1.2%, meaning it lit $1.20 of cash on fire for every $100 in revenue.

Final Judgment

We cheer for all companies making their customers lives easier, but in the case of Kimball Electronics, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 14.1× forward price-to-earnings (or $19 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are superior stocks to buy right now. Let us point you toward Uber, whose profitability just reached an inflection point.

Stocks We Like More Than Kimball Electronics

The Trump trade may have passed, but rates are still dropping and inflation is still cooling. Opportunities are ripe for those ready to act - and we’re here to help you pick them.

Get started by checking out our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,691% between September 2019 and September 2024) as well as under-the-radar businesses like United Rentals (+550% five-year return). Find your next big winner with StockStory today for free.