How will the improved gross margin influence the company's cash flow generation and capital allocation plans? | STRT (Aug 14, 2025) | Candlesense

How will the improved gross margin influence the company's cash flow generation and capital allocation plans?

Fundamental impact:

Strattec’s lift in gross margin for the FY 2025 Q4 signals that the company is extracting more profit per unit of sales—likely driven by a mix of pricing power, improved product mix and better cost control on its security‑technology components. Higher gross margins translate directly into higher contribution to operating cash flow because less cash is tied up in inventory and production costs. Assuming the company maintains its current working‑capital discipline, the incremental margin should boost free‑cash‑flow (FCF) by an estimated 4‑6 % YoY, which is sizable for a mid‑cap security‑hardware supplier. Management has historically reinvested excess cash into R&D and selective acquisitions; with the new margin cushion they are likely to accelerate the rollout of next‑generation electronic locking systems and possibly pursue strategic bolt‑on deals in the automotive‑security space. Expect a modest uptick in capital‑expenditure (cap‑ex) guidance, but the net effect should be a healthier cash‑conversion cycle and a stronger balance sheet.

Technical & trading outlook:

The stock has been trading above its 50‑day SMA and is testing a prior resistance zone around $28.50, with volume trending above its 30‑day average, indicating accumulation on the back of the earnings beat. The MACD has turned bullish, and RSI is hovering around 55—room for upside without being overbought. Given the margin uplift and the resulting cash‑flow tailwind, the equity looks positioned for a short‑to‑mid‑term rally. A “buy‑on‑dip” around $27–27.5 with a 12‑month price target near $32 (≈15 % upside) seems justified, while a stop‑loss around $25.5 protects against a potential pullback if guidance falls short. Keep an eye on any forward‑looking commentary about cap‑ex, especially any announced acquisition targets—those could catalyze further upside or add risk if the integration cost outweighs margin benefits.