Knowles (KN) Up 3.1% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Knowles (KN). Shares have added about 3.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Knowles due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Knowles Q4 Earnings Lag Estimates, Revenues Up Y/Y

Knowles reported mixed fourth-quarter 2019 results, wherein the top line rose year over year but the bottom line declined.

Net Income

On a GAAP basis, earnings from continuing operations for the reported quarter were $21.1 million or 22 cents per share compared with $79.4 million or 87 cents per share in the year-ago quarter. The decline was primarily attributable to a significant income tax benefit in the year-earlier quarter. For full year 2019, earnings from continuing operations were $49.7 million or 53 cents per share compared with $65.6 million or 72 cents per share in 2018.

Quarterly non-GAAP net earnings were $33.3 million or 35 cents per share compared with $34.9 million or 37 cents per share in the prior-year quarter. The bottom line missed the Zacks Consensus Estimate by 5 cents.

Non-GAAP net earnings in 2019 improved to $101.6 million or $1.07 per share from $94.5 million or $1.01 per share a year ago driven by higher revenues and lower operating expenses.

Revenues

Quarterly revenues rose 4.5% to $233.9 million from $223.8 million in the year-ago quarter. The increase was largely attributable to robust sales performance in the Ear and IoT markets, partially offset by soft trends in Mobile. However, the top line lagged the consensus estimate of $238 million.

Full-year 2019 revenues rose 3.4% to $854.8 million from $826.9 million on the back of higher Audio and Precision devices revenues amid weak handset market sales.

Segment wise, Audio revenues were up 2.8% year over year to $190.1 million in the quarter led by increased shipments of MEMS microphones and balanced armature speakers for the ear and IoT markets. However, softer demand for MEMS microphones and Intelligent Audio solutions for the high-end smartphone market partially offset the segment sales.

Revenues from Precision Devices increased 12.9% year over year to $43.8 million, primarily benefiting from 6% organic growth along with higher demand for differentiated products across multiple end markets with a tuck-in acquisition in the first quarter of 2019. However, it was partially offset by soft industrial demand for capacitators and shipment timings for mmWave filters.

Other Details

Non-GAAP gross profit declined to $90.9 million from $95.4 million for respective margins of 38.9% and 42.6%. This was below the company-provided guidance owing to operational challenges like unfavorable product mix, inventory adjustment and lower factory output.

Cash Flow & Liquidity

In 2019, Knowles generated $123.9 million of net cash from operating activities compared with $98.5 million a year ago. In the year, free cash flow was $82.7 million, up from $18.4 million in 2018.

As of Dec 31, 2019, the company had $78.4 million in cash and equivalents with $156.8 million of long-term debt compared with the respective tallies of $73.5 million and $158.1 million a year ago.

Q1 Guidance

Knowles has provided outlook for first-quarter 2020. Management expects revenues in the range of $160-$190 million with non-GAAP gross margin of 37.5-40.5%. Non-GAAP earnings are anticipated to lie within 8-16 cents per share.

Revenues from the Audio segment are expected to decline 4% year over year due to soft demand for Intelligent Audio products coupled with reduced MEMS microphone shipments to the China mobile market. Revenues from Precision devices are expected to rise 3% year over year on the back of increased shipments of mmWave filter to the defense and aerospace markets. However, it is likely to be partially offset by reduced shipments of high-end capacitors due to weak demand in industrial markets.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -52.86% due to these changes.

VGM Scores

At this time, Knowles has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Knowles has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.