This hearing device component company beat analysts’ estimates by $0.02 last quarter, and the company is expected to grow by 87.5% this quarter.
Knowles Corporation (KN)
From The Cutting Edge
Knowles Corporation (KN) provides components and services for a broad range of hearing instruments across multiple industries, and has done so for the last 65 years. This includes hearing aid components, MEMS (micro-electro-mechanical systems) microphones, speakers, receivers, transducers, capacitors, and oscillators.
The company’s solutions are used in more than 70% of hearing health products and ~65% of today’s mobile devices (private company Sonion is the only notable competitor).
Unlike humans, many modern devices come with just a single mic. This makes it especially difficult for Artificial Intelligence (AI) programs to determine where certain sounds are coming from. The solution, of course, is pretty simple: get more mics.
More specifically, the solution to AI’s “hearing problem” will immediately come in the form of microphone array—or any number of microphones operating in tandem. Apple has led the charge adding multiple mics in its iPhones (one rear-top, one front-top, and one bottom) and you can certainly expect that other OEMs will follow suit.
But the real bull case comes not just from smartphones requiring better hearing capabilities, but also from personal assistant devices at home and elsewhere. Amazon’s Echo speaker (arguably the most prolific home digital assistant on the market), for instance, uses a microphone array of seven (yes, seven) microphones. According to the teardown? They’re all made by Knowles.
What we especially like about Knowles is that on top of maintaining a dominant share of the hearing device market, the company remains focused on innovation and growth. It spends 6-7% of sales on R&D, and with each new generation of smartphones, its components have continuously offered new features (such as lower power draw and “always listening” functions) and continue to become smaller in size. This is why the world’s leading tech companies including Apple, Samsung, and Amazon all look to Knowles for their hearing instruments.
In 2012 acoustic content accounted for $2-3 of every smartphone. Today, Knowles has leveraged its technology to increase that number to around $3-5. This is hard evidence that OEMs are putting increased values on mics, and we only expect this trend to continue as AI becomes a major, if not the major selling point for tomorrows devices.
According to Tractica research, the virtual digital assistant market will reach $15.8 Billion by 2021, up from just $1.6 billion in 2015. Users of these programs are expected to grow from 390 million to 1.8 billion in the same time frame. This increased user-base should push the demand for microphone arrays even further, putting Knowles in an especially strong growth position.
Knowles isn’t particularly small when lined up against some of our recent recommendations, but it still has plenty of room to grow. Today, the company trades at a market cap of $1.25 billion, or just 1.27 times sales. From a valuation standpoint this is quite attractive.
Knowles has $47.2 million in cash on hand and long term debt of $390 million--arguably the company’s biggest concern. Still, Knowles reports $1.62 billion in assets and $625 million in total liability which, while not ideal, does limit risk.
Total revenue for Knowles (TTM) is $980.7 million. 57% of that figure comes from specialty components, while 43% comes from mobile consumer electronics. The company is diversified enough to weather any potential headwinds in consumer tech.
Knowles projects revenue in the range of $225 million to $240 million for the third quarter, gross margins between 38% to 40% and EPS in the range of $0.27 to $0.33.
We rate Knowles Corporation (KN) a Buy under $15.00. The Risk Level is Low.
Jason Stutman, The Cutting Edge, www.angelpub.com, 877-303-4529, October 11, 2016