3 Reasons KN is Risky and 1 Stock to Buy Instead

Over the past six months, Knowles’s shares (currently trading at $18.08) have posted a disappointing 7% loss, well below the S&P 500’s 6.9% gain. This may have investors wondering how to approach the situation.

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?

Even though the stock has become cheaper, 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

A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Knowles’s demand was weak over the last four years as its sales fell at a 6.2% annual rate. This was below our standards and signals it’s a low quality business.

2. Revenue Projections Show Stormy Skies Ahead

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Knowles’s revenue to drop by 7.2%, close to its 6.2% annualized declines for the past four years. This projection doesn't excite us and indicates its newer products and services will not catalyze better top-line performance yet.

3. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Knowles’s full-year EPS dropped 6.9%, or 1.4% annually, over the last five 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, Knowles’s low margin of safety could leave its stock price susceptible to large downswings.

Final Judgment

Knowles doesn’t pass our quality test. After the recent drawdown, the stock trades at 16.3× forward P/E (or $18.08 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. Let us point you toward one of our all-time favorite software stocks.

Stocks We Like More Than Knowles

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