What is the outlook for operating margins and cash flow generation going forward?

Fundamental outlook:

Kestrel Group’s Q2‑2025 release (sentiment score 10) signals a strong earnings beat, with management highlighting “robust top‑line growth” and “accelerated cost‑discipline.” The combination of higher‑margin product mix and continued supply‑chain efficiencies has already lifted the operating margin to the high‑7% range—well above the 5‑6% band it has historically traded in. Assuming the current pricing power and the “lean‑operating” initiatives stay on track, we can expect operating margins to stay in the 7‑8% corridor for the remainder of FY25, with incremental upside if the company successfully scales its new high‑margin service contracts announced in Q2.

Cash‑flow generation:

The same cost‑control narrative translates into stronger free‑cash‑flow (FCF) conversion. Kestrel’s Q2 FCF conversion rose to ~1.3× earnings, a marked improvement from the sub‑1.0× levels seen in 2023‑24. With the balance sheet now featuring a net cash position of roughly $150 million and a modest capex plan focused on automation, the firm should generate $45‑$55 million of net cash in the next two quarters, comfortably funding its dividend and share‑repurchase program. The positive cash‑flow trajectory also reduces leverage risk, supporting a higher valuation multiple.

Trading implications:

Technically, the stock has broken above its Q2‑2025 high (≈$28) on strong volume, holding the 20‑day SMA and testing the 50‑day SMA (~$30). A retest of the $30 resistance with bullish momentum would likely open the door to a short‑to‑mid‑term rally toward $33–$35, reflecting the upgraded margin and cash‑flow outlook. Conversely, a pull‑back below $28 could trigger a corrective bounce to the $26‑$27 support zone, where the price‑to‑earnings (P/E) compression would still be justified by the improving fundamentals. In short, the operating‑margin and cash‑flow upgrades give the stock a solid upside bias; a disciplined entry on a pull‑back to $28–$29 with a stop just below $26 would position traders to capture the upside while limiting downside risk.