Knowles: Brighter Future Than Their Past

seekingalpha04-16

While Knowles's stock has been a laggard for the past decade, structural changes in the business imply a potentially different future.Present business conditions include various temporary headwinds ...

Source Link

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Comments

We need your insight to fill this gap

Leave a comment

{"i18n":{"language":"en_US"},"isChannel":false,"data":{"share":"https://ttm.financial/m/news/2427885588?lang=en_US&edition=fundamental","thumbnail":"https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1216437942/image_1216437942.jpg","is_english":true,"pubTime":"2024-04-16 00:23","share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","id":"2427885588","market":"hk","top_or_hot":-1,"title":"Knowles: Brighter Future Than Their Past","media":"seekingalpha","content":"<div>\n<p>While Knowles's stock has been a laggard for the past decade, structural changes in the business imply a potentially different future.Present business conditions include various temporary headwinds ...</p>\n\n<a href=\"https://seekingalpha.com/article/4683822-knowles-brighter-future-than-their-past\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Knowles: Brighter Future Than Their Past</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nKnowles: Brighter Future Than Their Past\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-04-16 00:23 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4683822-knowles-brighter-future-than-their-past><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>While Knowles's stock has been a laggard for the past decade, structural changes in the business imply a potentially different future.Present business conditions include various temporary headwinds ...</p>\n\n<a href=\"https://seekingalpha.com/article/4683822-knowles-brighter-future-than-their-past\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4104","symbol_name":"贸易公司与经销商","start_time":0,"source_url":"https://seekingalpha.com/article/4683822-knowles-brighter-future-than-their-past","article_id":"2427885588","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1216437942/image_1216437942.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2427885588","pubTimestamp":1713198186,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"While Knowles's stock has been a laggard for the past decade, structural changes in the business imply a potentially different future.Present business conditions include various temporary headwinds th","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4104":"贸易公司与经销商","T":"美国电话电报","MDT":"美敦力","LU1989771016.USD":"东方汇理环球老龄化投资基金 A2 Acc","BK4187":"航天航空与国防","LU0098860793.USD":"FRANKLIN INCOME \"A\" INC","LU0208291251.USD":"FRANKLIN MUTUAL U.S. VALUE \"A\" (USD) INC","LU1162221912.USD":"FRANKLIN INCOME \"A\" (USD) ACC","LU2125909916.SGD":"Natixis Thematics Safety R/A SGD","BK4534":"瑞士信贷持仓","PD":"PagerDuty, Inc.","ORAN":"法国电信公司","LU1989764664.SGD":"CPR Invest - Global Disruptive Opportunities A2 Acc SGD-H","LU1923622291.USD":"Natixis Thematics Safety R/A USD","MSA":"Mine Safety Appliances Co","DSGR":"Distribution Solutions Group, Inc.","LU0321505868.SGD":"Schroder ISF Global Dividend Maximiser A Dis SGD","BK4533":"AQR资本管理(全球第二大对冲基金)","LU1989764748.USD":"东方汇理环球颠覆性机遇A2 Acc","LU1914381329.SGD":"Allianz Best Styles Global Equity Cl ET Acc H2-SGD","IE00BSNM7G36.USD":"NEUBERGER BERMAN SYSTEMATIC GLOBAL SUSTAINABLE VALUE \"A\" (USD) ACC","LU0321505439.SGD":"Schroder ISF Global Dividend Maximiser A Acc SGD","LU1169589451.USD":"ALLSPRING (LUX)  U.S. SELECT EQUITY \"A\" (USD) ACC","LU0320765646.SGD":"FTIF - Franklin Income A MDIS SGD-H1","BK4082":"医疗保健设备","LU1621767737.EUR":"AZ EQUITY GLOBAL INFRASTRUCTURE \"AAZ\" (EUR) ACC","LU0053671581.USD":"摩根大通美国小盘成长股 A(dist)","LU2384288077.EUR":"AZ EQUITY GLOBAL INFRASTRUCTURE \"A-INS\" (EUR) ACC","VZ":"威瑞森","LU1066051498.USD":"HSBC GIF GLOBAL EQUITY VOLATILITY FOCUSED \"AM2\" (USD) INC","LU1621767810.EUR":"AZ EQUITY GLOBAL INFRASTRUCTURE \"A\" (EUR) INC","LU0211326755.USD":"TEMPLETON GLOBAL INCOME \"A\" (USD) ACC","LU1621768206.USD":"AZ EQUITY GLOBAL INFRASTRUCTURE \"AAZ\" (USD) ACC","LU0070302665.USD":"FRANKLIN MUTUAL U.S. VALUE \"A\" (USD) ACC","LU1621768115.EUR":"AZ EQUITY GLOBAL INFRASTRUCTURE \"B\" (EUR) INC","LU0158827948.USD":"ALLIANZ GLOBAL SUSTAINABILITY \"A\" (USD) INC","BK4115":"综合电信业务","CMM.AU":"CAPRICORN METALS LTD","LU0868494617.USD":"UBS (LUX) EQUITY SICAV - US TOTAL YIELD SUSTAINABLE \"P\" (USD) ACC","BK7104":"黄金","LU2089283258.USD":"安联环球可持续基金Cl AM Dis","LU1291159041.SGD":"CPR Invest - Global Silver Age A2 Acc SGD-H","KN":"KnowlesCorporation","LU1244550577.SGD":"FTIF - Franklin Global Multi-Asset Income A (Mdis) SGD-H1","BK4581":"高盛持仓","LMT":"洛克希德马丁","LU0211326839.USD":"TEMPLETON GLOBAL INCOME \"A\" (USD) INC","LU1585245621.USD":"EASTSPRING INV GLOBAL LOW VOLATILITY EQUITY FUND \"A\" (USD) ACC B","LU1571399168.USD":"ALLSPRING GLOBAL LONG/SHORT EQUITY \"IP\" (USD) ACC","LU1815336091.USD":"THREADNEEDLE (LUX) GLOBAL SMALLER COMPANIES \"AUP\" (USD) INC"},"translate_title":"诺尔斯：比过去更光明的未来","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"VZ":1,"LMT":1,"KN":1,"DSGR":1,"CMM.AU":1,"MDT":1,"MSA":1,"ORAN":1,"PD":1,"T":1},"content_text":"While Knowles's stock has been a laggard for the past decade, structural changes in the business imply a potentially different future.Present business conditions include various temporary headwinds that, I think, will abate in the coming year(s) including destocking and idiosyncratic macro headwinds.Over time, this is a competitive company with structural end-market tailwinds - e.g., growing hearing aid demand, defense growth - that should translate into higher sales and EBITDA.Sundry Photography/iStock Editorial via Getty Images Introduction Knowles Corporation (NYSE:KN) has had a bit of an underwhelming history and indeed, the stock's been essentially flat (with minimal variability) for the past 9 years. Thanks to poor capital allocation decisions (M&A) resulting in negative value for shareholders and competitive pressures in their MEMS business, a lot of investors have been understandably disinterested in the business. But like most investors are reminded, historical returns are not indicative of future returns. To this end, I think KN's history is going to look different from the future. Two things that have plagued them historically, they're \"getting rid of\" - they're looking to sell their hyper-competitive MEMS (CMM) business, and they're refining M&A to higher quality markets. Cross that with temporarily pressured sales from macro and destocking pressures, which should abate, and Knowles is positioned to be a structurally better business that deserves a higher multiple. Precision Devices (PD): Temporary Headwinds Knowles's PD segment, where they sell RF filters and capacitors, is spread across a few different verticals. (four, basically). In the healthcare vertical, they largely sell to MRI and pacemaker manufacturers, but into other implantable devices like insulin pumps too. In the automotive vertical, they sell ceramic capacitors to EV suppliers for both vehicle manufacturing and charging. In the defense/military vertical, they're in various programs for both new equipment production and upgrades - e.g., Lockheed Martin Corporation's (LMT) F-35 program. And then they have a catch-all bucket they term \"Industrial/distribution\". Q4 2023 PD sales were up ~10% to ~$70M. However, this wasn't organic. In November 2023, they acquired Cornell Dubilier, and as they pointed out on the Q3 call, their contribution amounted to ~$20M in sales in Q4 (2 months' worth). Minus that contribution, and PD sales would have declined ~22%, consistent with Q3's decline of 22%. They're battling various temporal headwinds that should abate. A lot of the sales decline had to do with inventory destocking in their distribution and industrial end-markets (they argue that actual end-market demand is \"stable\"), which I find reasonable. Specifically, the softness seemed to pertain to their telecom exposure and to that end, if we just look at 2023 capex spend amongst major carriers, it's down - see Verizon Communications Inc. (VZ), AT&T Inc. (T), and Orange S.A. (ORAN). And we can see that versus 2022, industrial activity has softened too. Furthermore, the destocking makes sense. Just recently, we discussed Distribution Solutions Group (DSGR) for instance who reported destocking by their customers (and they themselves were destocking too). But as a broader read across the industry, it's been well reported that this phenomenon is happening across the vast majority of the industry landscape. As for their defense vertical, as they started calling out in mid-2023, LMT incurred production delays and ended up delivering 98 F-35's in 2023, down from 141 in 2022 (they sell into LMT's F-35 program). And in Q4, they delivered 18 versus 53 in the prior year. Their reasoning behind this reduction didn't seemingly have to do with anything structural, but merely a delay from hardware and software configuration being more challenging than planned. Regarding EVs, I think we've all seen the headlines lately, but looking backwards, more EVs were sold in 2023 - full year and Q4 - than in 2022 according to Cox Auto. They also point out to that EV inventories have risen faster, thus implying that production was further boosted. And then, finally, there's their medtech verticals. It's not clear if they grew or declined - they declined in Q3 per the 10-Q, which may be resulting from destocking here as well. This wouldn't be unreasonable given the broader backdrop laid out earlier. But we also know that their medtech business within MSA has seen destocking throughout 2023. Medtronics (MDT) - who manufacturers pacemakers and other implantable devices - was posting high-single-digit growth here in latter 2023, and low-single-digit growth for the cardio segment as a whole which includes other implantable devices. With this backdrop, assuming that is the explanation for the sales decline, one could reasonably construct a favorable outlook. Taking their $70M in sales today, adding another month of CD, normalizing destocking behavior, and adjusting for higher F-35 production - see LMT comments - puts me at around ~$83M in normalized PD quarterly sales today. The EV market could decline in 2024 - a real near-term risk - but I expect it to have an immaterial impact over time. Over time, it's reasonable to expect this to grow, as evidenced by their history. (1) Population growth will drive medtech sales, (2) defense is seeing increased communication intensity across the military complex, (3) it's likely EVs will grow post-2024, and (4) they also expect increasing pricing from CD (an H2 2024 thing). At 7% growth post-2024 - historically consistent - they would be posting ~$380M in FY26. The biggest risk is likely competition - which is fragmented - but I think they have a fairly durable position. While we don't have real time data, for what it's worth, management can't point to any competitive headwinds. But stepping back, the fact that they're a supplier to Lockheed is telling. And management has talked about how they have a good share of higher performance capacitor demand. Neither of those data points suggest their engineering quality is uncompetitive. From a qualitative angle, too, their products are highly customized to that specific customer. As such, they get favorable dynamics like in medtech where long design cycles and FDA approval barriers prevent others from taking that business. I.e., Once you're in, you're in for the life of the product. They also confirmed that many contracts are \"long term\" - 2-3-4 years - and that they're the sole source for many products. So, for all of these reasons, I think the competitive risk is muted. If this is true, and end-market demand trends like I'd expect, I feel comfortable assuming they grow once we get past today's noise. And then there's an extra benefit to this model if I'm right, which is operating leverage. As evidenced by EBITDA margins declining from 32.5% last year to 18.7% today, there's a lot of inherent fixed cost leverage. This would make sense too - outside some variable costs above like transportation and raw materials, being the manufacturing business they are, there's a lot of both people and equipment costs (D&A) within COGS which aren't-so-variable. Then you've got R&D and S&A costs, which are more or less fixed too at the opex level. Looking ahead then, notwithstanding the potentially that CD grows margins from pricing, there's going to be positive fixed cost leverage on the way up. And to this end, very simply, there's no reason they can get back to low-30% EBITDA margins - the $380M sales estimate noted earlier implies $95M in quarterly sales, much higher than the mid-$60M posted last year when they earned those margins. Indeed, I think one can reasonably expect mid-30%+ margins, but for conservatism, I won't model beyond that. Putting it together then, notwithstanding the extra sales leverage and incremental synergies from the CD integration in the interim, 35% EBITDA margins implies FY26 sales/EBITDA of $380M/$133M for PD. Medtech & Specialty Audio (MSA): Stable Grower Their MSA business is less segmented vis-à-vis PD. Technically, there are two buckets of revenue, but practically speaking, only one as it accounts for ~90% of sales. That business is their hearing aid business, where they manufacture and sell armature speakers and MEMS microphones to hearing aid OEMs - company-posted illustration here on YouTube. For the rest of the segment, they sell speakers into specialized - mostly music-related - equipment. Q4 2023 MSA sales were up ~9% to $67.4M. There was likely some price per the earlier comments about price being \"stable\". However, they noted in FY22 receiving lower prices for mature products - a typical pattern, it seems - although we know that they offered customer incentives in last year's Q4, which haven't continued. So, any benefit was likely marginal. From a volume standpoint, we also know that their MSA segment has been battling customer destocking throughout 2023 too. They initially called this out too in Q4 2022, but by Q2 2023, they noted inventories as being largely normalized. Thus, as they noted on the Q4 call, this normalization contributed then to their year-over-year growth as Q4 2023 was unaffected by this versus a partly affected Q4 2022. How much this contributed, it's hard to tell precisely - Q3 sales were up 20%, however Q3 2023 incur headwinds from accelerated orders in H1 2022. Net, however, we know it contributed, but likely not all the volume growth. To this end, their end-markets have seemingly been performing well. For context, the end-market is concentrated essentially amongst 5 players, so there are only a few select OEMs that KN ultimately sells to here. Data from the Hearing Industry Association shows that after a flat year in 2022, unit hearing aid volumes - excluding over-the-counter units - were up mid-to-high-single-digits in 2023. Understandably too, I wouldn't expect material macro impacts. While neither Medicare or private insurance providers cover the entire costs of the hearing, if any, management provided some qualitative color at a conference discussing the non-discretionary contextualization by this customer demographic. And indeed, per this data from Hearing Industries Association, we can see that the market declined a mere 1% in 2008 before growing thereafter, consistent with this hypothesis. Offsetting this angle, however, since there's likely some impact, is the over-the-counter market growth. For recent context, the FDA approved a category of OTC hearing aids in 2022 targeting people with \"mild-to-moderate hearing loss\" that's (naturally) being filled by retailers - i.e., you can now buy hearing aids online or in-store. This thus is effectively a new product category targeting an untapped portion of the population. And expectedly, Knowles is an active supplier here and seeing a number of large, national retailers start to add OTC hearing aids to their stores. Resultantly, they're picking up sales here not present in 2022, although the size remains unclear - they claim it's not yet \"material\" to sales. Competitively, there are some attractive angles supporting durability, but market share looks fairly stable today. There's really only one other player they bump up against, which is Sonion who's headquartered in Denmark. Knowles suggests that they have ~70% market share whereas Sonion has ~30%. We don't have real-time data on market share, but the fact that they grew year-over-year relatively close to disclosed market growth is a good starting point reflecting that they didn't lose market share. Qualitatively, price is \"stable\" versus the prior year, so that would be consistent, and there's not any other material value proposition change happening (minus likely some typical technical iterations). And if we look at the past few years, they've tracked market-wide trends - i.e., declining in 2020, but growing in 2021, then trending flat in 2022. Stepping back, I think the competition risk is limited for structural reasons. With essentially 5 manufacturers and engineers preferring to collaborate with a known party, this consolidates suppliers, while concurrently giving someone like Knowles superior feedback to maintain a superior product. Furthermore, there's a low cost/high cost of failure dynamic at play - prescriptive hearing aids retail for a few thousand dollars and wholesale for likely around half of that. Considering KN sells ~$5-10 per hearing aid, OEMs won't get much trying to save a dollar by finding cheaper BA vendors. And the same goes for OTC products, which also retail around $1,000. Lastly, with respect to new entrants, some of the aforementioned elements provide a bit of a technical barrier to entry, but it's ultimately a small (less attractive) market to jump into. I.e., KN is doing ~$60M in sales quarterly or $240M annually - at 70% of the market, we're looking at a $350M-ish market thereabouts. Added all up then, we'll see more people with more hearing aids in the future as population growth and natural hearing loss isn't going away. Furthermore, the OTC market is likely to be a bigger business in 3-5 years than it is today, notwithstanding macro conditions that may temporarily affect this part of the market. So, it seems reasonable to me that a 3-4% growth rate is sustainable - today's 9% is unsustainable given the comp/destocking benefit. Taking today's $67M in quarterly sales, there is some seasonality as they note on the call with Q4 being a stronger quarter, but we can think about today's sales amounting ~$250M on an annual run rate basis. If my growth assumption is accurate, they would take today's $250M business to ~$275M by FY26 (giving marginal credit for the OTC angle). Margin-wise, they posted adjusted gross/EBITDA margins of 54.2%/45.8% compared to 51.6%/44% in the prior year, with a lot of the dynamics matching what we see in PD. Contributions margins are likely higher year-over-year given \"stable\" pricing and the fact that last year included offered incentives, thus making the comp easier. But also like PD, a lot of the year-over-year growth stemmed from operating leverage, as one might expect given the similar manufacturing operations. This would be consistent too with their history - e.g., we can see that when MSA sales rose from $173M in 2020 to $231M in 2022, segment EBIT went from $22M (12.7% margin) to $77M (~33% margin). Looking ahead, we're evidently not seeing any contribution margin pressure, however, it's not unreasonable to get into a more competitive environment on a temporary basis. Holding that aside though, they'll obviously pick up sales leverage should they grow. To this end, I think mid-50% incremental EBITDA margins are achievable. They posted ~80% incremental segment margins in 2022, although that's not representative. But very simply, they post mid-50% adjusted gross profit margins and mid-40% adjusted EBITDA margins. And I find it conceivable they post ~70% incremental adjusted gross margins, and so minus a sales commission of say, 20% of gross margin, or ~15% of the sale, that amounts to ~55% incremental EBITDA margins. Actually, on a sequential basis, they posted just that - $11M in sales growth and $6M in EBITDA growth, or mid-50% incremental margins, consistent with that. If true, their margins will grow alongside sales. Presently, their $250M sales run rate today is earnings ~45% EBITDA margins today (seasonally adjusted). Should they grow to $275M in sales by FY26 with incremental EBITDA margins of 55%, they'd post EBITDA of $126M (~45-46% margins). The risk I worry about is a structural step down in market share. Like I noted, they were offering customer incentives in 2022, which likely reflects competitive pressures. But if we go back to 2017, they talked about losing some market share from being more \"price discipline\" which to me seemingly translates into \"we didn't want to take our prices down like our competitors\". Of course, this was a temporary affect to the business, but who's to say this can't happen further? Although, to be fair, this would reflect a temporal step down in sales, not a permanent decline. Consumers MEMS (CMM): Contemplated Sale As announced in 2023, management is looking to sell their CMM business, so I'm not going to spend much time here. Very simply, sales increased 8% in Q4 to ~$78M from non-mobile growth and a \"recovering\" PC market. Indeed, 2023 was a tough market for electronics, so it's reasonable to see increasing demand today. Indeed, looking at 2024, they're \"optimistic\" about the business and are seeing \"strong demand\" in Q1. Concurrently, EBITDA margins were roughly flat year-over-year at 12.3%. Put together, we'll keep this segment simple. There is some seasonality and Q4 is typically a larger quarter, but ~$75M is a fine quarterly run rate, implying ~$300M in annual sales. Assuming 12% EBITDA margins, that's ~$36M in annual EBITDA. We'll assume they grow another 5% in 2024 to $315M in sales with no operating leverage, such that EBITDA would be ~$38M. This is likely too conservative as they posted over $400M in sales in FY20 and FY21. I'm assuming zero growth in this segment post-2024 (will likely be sold before we get there). Valuation: Attractive Risk/Reward With respect to capital allocation, this has been a point of difference amongst investors. KN's history here has not been spectacular - e.g., they acquired Audience in 2015 which went from about $40M in sales to around half of that a few years later from product commoditization. However, while I do expect them to continue to spend money on M&A going forward, I think the probability it's dilutive is relatively low. For one, their history is not all bad. Two, they discussed that they're now focused on M&A within PD, a much higher quality segment with less commoditization risks - indeed, their previous M&A struggles were in CMM and specialty audio. Three, the deals have been strategically sound - e.g., expanding breadth, increasing cost efficiency, and expanding into new attractive markets. And then fourthly, the multiples paid have been fine - they paid sub-10x EBITDA for CD, and they're expecting more synergies than they originally calculated. So, if I put it all together, on an FY26 basis, I think PD could be posting sales/EBITDA of $416M/$141M, MSA could be posting sales/EBITDA of $275M/$126M, and we'll assume CMM posts $315M/$38M. Collectively, that's sales/adjusted EBITDA of $1B/$305M. Subtracting SBC at 4% of sales ($40M), D&A at 4% ($40M), $12M in interest expense, 25% tax rate, and capex at 4.5% of sales ($45M), I get a free-cash-flow figure of ~$155M. Personally, I think this is reasonably worth upper-teens - call it, 18.5x - with low-to-mid-single-digit growth in their MSA and CMM business averaged higher from mid-to-high-single-digit PD growth. Furthermore, operating leverage will drive higher EBITDA growth. However, I do think it's rational to price in likely imperfect capital allocation and competitive risks. Net, this amounts to an implied market cap of $2.87B - add in ~$300M of interim cash flow generation and that ~$3.17B. Discounted back 3 years gets me to an implied fair value of ~$26/share with 89.6M shares outstanding today versus today's price of high-$15/share. Now, this implicitly assumes that their CMM business is sold at 18.5x FCF which is likely a little too optimistic. However, for one, it's a relatively less significant part of their EBITDA distribution. And then, for two, even if one was to bring down the multiple to more mid-teens, there's still a decent margin of safety embedded here - i.e., even at 15x FCF, I still get a fair value north of $20/share. However, one risk that does concern me - after a peer pointed this out to me - is that there could be a \"fire sale\" with CMM. Indeed, management has been clear now that they want to get this business off their hands, and we all know a motivated seller is what buyers look for. This, then, could knock a few dollars off of my fair value. And the other risks I worry about are competitive, however, (1) the extent of competitive share losses are structurally tempered given the slow turnover nature within PD and MSA, and (2) here again, with respect to both risks, today's price embeds a nice margin of safety. Conclusion I think Knowles presents an attractive risk/reward at these prices. There are some competitive concerns I have on a near-term basis, but structurally speaking over time, I don't think there's a huge risk they experience existential issues - i.e., competitors in aggregate leapfrog them. And there's also the risk of capital allocation, but here too, I think this angle is a bit overstated per their updated capital allocation policy.  On the other hand, the world is going to broadly result in a bigger business for them over time - e.g., growing communication equipment, hearing aid/population growth - that they'll benefit from. And with the inherent operating leverage, EBITDA can grow at incrementally higher rates.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2427885588"}