Methode Electronics. | Executive Summary
Cindy Anggraini, Rahul Gohil, Lu Han, Zhi Cheng (Nicole) Low, Vanditha Mysore Ravindranath
December 1, 2015
Methode Electronics, Inc. (NYSE:MEI)
Position: We own 100 shares purchased at $46.61 on 4-13-2015, now trading at $36.08
Company Overview
Methode Electronics, Inc. (Methode) was founded in 1946 and is headquartered in Chicago,
Illinois. The Company designs, manufactures and markets devices employing electrical, radio remote
control, electronic, wireless and sensing technologies in the United States, China, Malta, and
internationally. It operates through segments, including Automotive, Interface, Power Products and Other.
Methode is constantly seeking opportunities for expansion into additional end markets by investing in
new projects, such as SmartCenterStack, HighPerTouch, 10G Copper Transceiver Modules, and
DabirSurfaces. It also competes with several other large auto suppliers that offer similar products;
increased price competition or enhanced product offerings could impact Methode’s profits and growth
rate. Huge reliance on GM and Ford for a significant amount of revenue (45% and 13% respectively, in
FY15) has exposed the company to the cyclical automotive industry.
Macroeconomic Outlook & Industry Overview
Methode Electronics operates under the electronic manufacturing services industry within the
technology sector. Most of their products are used by automobile manufacturers, home appliance makers,
transportation companies, as well as heavy industry. Hence, the demand for Methode’s products is highly
dependent on the demand and purchasing power of the end user. Given that 71% of their revenues is
presently generated from the automotive segment, favorable trends in automotive industry, increasing
global automotive sales, and growing consumer electronics markets are the main drivers of future growth.
Furthermore, several key markets for Methode Electronics within the automotive sector are also expected
to grow. For example, electric vehicle power sources are expected to grow by 11.1% between 2014 and
2019. Although the bargaining power of buyers are high, moderate bargaining power of suppliers and
rivalry, as well as low threat of new entrants and substitute products makes the industry attractive.
Financial Analysis
The company has posted impressive earnings growth over the last 5 years. Total annualized revenue
growth between 2011 and 2015 is 19.8% and the annualized operating growth between 2011 and 2015
was 62.7%. Key financial ratios confirm that this company is a fundamentally strong and stable business.
For the three months ended 01 August 2015, Methode Electronics Inc. revenues decreased 7% to
$203.3M. Net income increased 10% to $23.5M. Revenues reflect Interface segment decrease of 24% to
$34.1M, Automotive segment decrease of 1% to $154.9M. Net income reflects Automotive segment
income increase of 32% to $35.9M, Power Products segment income increase of 3% to $3.1M. Dividend
per share remained flat at $0.09. Methode maintains a strong balance sheet with robust operating cash
flow and low leverage levels.
Valuation
Comparable Valuation
DCF Valuation
31
22.97
Recommendation
After the DCF valuation, we suggest selling of the 100 shares we own at the current market price.