University of Illinois at Urbana-Champaign
Applied Portfolio Management
Methode Electronics
Cindy Anggraini
Lu Han Rahul Gohil Vanditha R
December 1, 2015
Zhi Cheng (Nicole) Low
Cindy Anggraini
anggrai2@illinois.edu
Lu Han
luhan4@illinois.edu
Rahul Gohil
gohil3@illinois.edu
Vanditha R. M
mysorer2@illinois.edu
Zhi Cheng (Nicole) Low
zlow4@illinois.edu
ANALYSTS
100 shares
on Apr 13,
2015
Source: Yahoo Finance
Purchase
Price =
$46.61
Current
Price =
$36.08 at
Nov 30,
2015
Return =
-22.59%
Holding
Company Overview
Macro-economic Overview
Financial Analysis
Technical Analysis
Projection & Valuation
Recommendation
AGENDA
Company
Overview
Macroeconomic
Overview
Financial
Analysis
Technical
Analysis
Projection
&
Valuation
Recomm
endation
Company Overview: Introduction
Automotive
Interface
Business Description
Primary Industry
Year Founded
Power
Products
Market Cap
TTM P/E
Manufacturer of component and subsystem devices
Electronic Manufacturing Services
1946
$1.4 billion
13.78
Other
Source: Yahoo Finance
Company Overview: Operating Coverage
USA
Europe
The company is operating globally, with mostly in USA, Europe, and Asia
The biggest facilities are in Mexico and Malta
Asia
Company Overview: Revenue Breakdown (2015)
Product
Geographic
Source: Investor Presentation
Company Overview: Automotive Segment
Integrated Center
Console
•
•
•
•
•
Ford
General Motors
Renault
Fiat
Aston Martin
Source: Investor Presentation
Transmission
Solutions
• General Motors
• Ford
• VW
Torque Sensor
• BMW
Hidden & Ergonomic
Switches
• Global Market
Share of 18%
• European Union
Market Share of
35%
Company Overview: Interface Segment
Consumer Touch Panels
• High resolution LCD
touchscreens
• Over 30% of
commercial/industrial
solid state touch
interfaces in North
America
Source: Investor Presentation
Industrial User
Interfaces
• Radio Remote Control
Solutions
Data Center
Infrastructure Solutions
• Fiber Optic & copper
cable assemblies
• Uninterruptable
Power Supply
Main Clients
• Coca Cola, John
Deere, Whirlpool,
Kitchen Aid, Maytag,
Hitachi
Company Overview: Power Products Segment
• Braided flexible cables
• EV bus bar assemblies
• Nissan Leaf
• North America & Europe
• Each vehicle requires 48 battery modules
• Three Methode assemblies utilized on each battery module
• Tesla S
• PowerRail
• Power distribution system
• Currently shipping to “Big Data” customer
Source: Investor Presentation
Company Overview: Future Projects
1
4
SmartCenter Stack
Wireless cell phone connection, Vehicle touchscreens
2
HighPerTouch
3
10G Copper Transceiver Modules
Enhanced touch performance
More cost effective than optical counterparts
Dabir Surfaces
New technology for pressure ulcer prevention
Source: Investor Presentation
Company Overview: SWOT
• High exposure
to automotive
sector, esp.
Ford and GM
• Lengthy sales
cycle
• Price of raw
materials
• Highly
competitive
market
environment
• Exchange rate
• Engagement
in M&A
activity
• Diversifying
product
portfolio
T
Threats
• Distribution
and sales
network
• Tax
advantages
due to global
locations
• Low debt
financing
O
Opportunities
W
Weakness
Strengths
S
• Changes in
technology
• Continued
pressure to
lower prices
Company Overview: Porter 5 Forces
Bargaining
Power of
Buyers:
Bargaining Power of Buyers – High
Continued pressure to lower prices to avoid
competition
High
Bargaining
Power of
Suppliers:
Rivalry:
Moderate
Moderate
Porter 5
Forces
Bargaining Power of Suppliers – Moderate
Availability of raw materials from different
suppliers
Threat of new entrants – Low
High initial investments
Threat of substitutes – Moderate
Customized products for each manufacturer
Threats of
Substitutes:
Moderate
Threats of
New
Entrants:
Low
Rivalry among existing competitors – Moderate
Competition on Price and Technological
advancements
Company
Overview
Macroeconomic
Overview
Financial
Analysis
Technical
Analysis
Projection
&
Valuation
Recomm
endation
Macro-economic Overview
Automotive Industry
• US vehicle sales will
rise to record peak in
2017
• Tesla S and Nissan leaf
among top 5 electric
car models
Electronic Industry
• Rapidly-increasing
data traffic is driving
the demand for data
storage
• Global power
electronics market
growth rate to fall
post 2018
Heavy Equipment
Industry
• Agriculture equipment
demand to fall in US,
offset by Asia
• Heavy construction
equipment market
driven by emerging
markets
Source: KPMG’s Global Automotive Executive Survey 2015, Clean Technica, DatacenterDynamics, HIS Technology, PR Newswire, Freedonia Group
Macro-economic Overview
Automotive Outlook Based on Sales Volume
Long-term Touch Module Shipment Forecast
• GM & Ford will hold their position by sales volumes in 2020
• Touch Panel Module shipments to rise but at lower growth rates
Source: IHS, KPMG Global Automotive Survey
Company
Overview
Macroeconomic
Overview
Financial
Analysis
Technical
Analysis
Projection
&
Valuation
Recomm
endation
Financial Analysis: Agenda
• Financial Highlights
• Liquidity and Leverage Ratio
• Profitability and Activity Ratio
• Greenblatt and Dupont Ratio
Financial Highlights: Revenue Breakdown (2015)
Automotive
Interface
Power Products
Source: 10-k 2015
Financial Analysis: Liquidity & Leverage Ratio
Liquidity Ratio
Leverage Ratio
Source: 10-k 2015
Financial Analysis: Profitability & Activity Ratio
Profitability Ratio
Activity Ratio
Source: 10-k 2015
Financial Analysis: Greenblatt & Dupont Ratio
Dupont Analysis
Tax Burden
Interest Burden
Operating Profit Margin
Asset Turnover
Leverage
ROE
2011
134.48%
90.63%
3.74%
2012
73.68%
100.00%
2.45%
1.26x
1.44x
3.27%
2013
107.39%
96.68%
7.54%
1.24x
1.54x
14.95%
2014
126.61%
103.13%
9.52%
1.53x
1.48x
28.21%
2015
83.69%
107.66%
12.73%
1.49x
1.39x
23.77%
Greenblatt Ratio
42.42%
45.00%
40.00%
35.00%
27.90%
30.00%
25.00%
18.10%
20.00%
15.00%
10.00%
10.60%
4.26%
6.94%
4.15%
2011
2012
5.00%
7.83%
7.08%
7.34%
0.00%
2013
EBIT/Tangible Asset
2014
2015
EBIT/EV
Source: 10-k 2015
Company
Overview
Macroeconomic
Overview
Financial
Analysis
Technical
Analysis
Projection
&
Valuation
Recomm
endation
Technical Analysis
Methode Electronics
Big drop (around
30%) on June 25,
2015 because
company’s
financial results
were not able to
meet the investor
expectations.
Source: Yahoo Finance
Company
Overview
Macroeconomic
Overview
Financial
Analysis
Technical
Analysis
Projection
&
Valuation
Recomm
endation
Projection and Valuation: Agenda
1
Assumptions
2
3
Revenue Projection
Valuation : DCF and Comparable
Projection and Valuation: Assumptions
• Management guidance for 2016
• Sales - $830-$865mm
• Operating Income - $108-$119mm
• Continue to invest in core business and grow
• Maintaining strong and flexible balance sheet with ample liquidity
• Targeting 5 year EBITDA CAGR of 9-10%
• Auto sales to peak in 2017 and drop after that
Source: Investor Presentation
Projection: Revenue
Revenue Projection
Revenue Projection per Segment
Projection: Revenue per Segment
Interface
Automotive
Power Products
Valuation: DCF
in $ million (unless stated)
Net Income
Depreciation
CapEx
Changes in net working capital
Increasein Acc Receivable
Increase in Inventory
Increase in Acc Payable
Net Changes in Working Capital
Free Cash Flow
Discounted Cash flows
Net Present Value of the firm
Value of Debt
Value of Equity
Assumptions
Discount Rate
Long Term Growth Rate
No of Shares OutStanding (mn)
1
2016E
99.1
18.1
26.0
13.8
10.8
6.7
17.9
73.4
64.4
888.9
5.0
883.9
DCF Valuation
2
3
2017E
2018E
118.4
141.0
19.6
21.4
30.8
36.5
35.8
16.1
2.4
49.4
57.8
44.5
Share Price
13.9%
4.0%
38.5
41.4
18.5
3.3
56.6
69.4
47.0
4
2019E
165.8
23.5
42.7
5
2020E
192.0
26.0
49.3
40.3
14.3
3.9
50.6
96.0
57.1
42.8
19.9
6.2
56.5
112.3
58.6
Terminal Value
USD 23.0
1,182.0
617.2
Valuation: Sensitivity Analysis
22.97
12.88%
13.38%
13.88%
14.38%
14.88%
3.00%
23.72
22.48
21.36
20.33
19.40
3.50%
24.69
23.34
22.13
21.02
20.02
4.00%
25.77
24.30
22.97
21.78
20.69
4.50%
26.98
25.36
23.91
22.61
21.43
5.00%
28.34
26.54
24.95
23.53
22.25
Valuation: Comparable Methodology
Industry: Electronic
Manufacturing
Services
Sector: Technology
CTS
Designs and manufactures sensors and actuators,
and electronic components worldwide.
Similar End Markets
Similar Product Mix
Amphenol
Designs and manufactures electrical, electronic,
and fiber optic connectors worldwide.
AVX
International
Exposure
Designs and manufactures electronic passive
components and interconnect solutions worldwide.
Valuation: Comparable Valuation Result
LTM EV/Revenue
LTM EV/EBITDA
LTM P/E
LTM P/BV
CTS Corp. (CTS)
1.4x
8.4x
22.8x
2.7x
Amphenol Corp. (APH)
3.3x
14.1x
22.9x
80.5x
AVX Corp. (AVX)
1.1x
5.9x
11.0x
1.2x
Median
1.4x
8.4x
22.8x
2.7x
Implied Price
35.8
37.1
60.6
31.6
Equally weighted average price per share: $41.3
Valuation: Background of Comparison
1
MEI is a unique company
2
3
Most of its revenue comes from automotive
Market treats MEI similar to its customers
Valuation: Comparable Valuation Result (Cont.)
LTM EV/Revenue
LTM EV/EBITDA
LTM P/E
LTM P/BV
Whirlpool Corp. (WHR)
0.8x
8.7x
19.0x
2.7x
General Motors Company (GM)
0.6x
6.0x
13.3x
1.7x
Ford Motor Co. (F)
1.1x
10.8x
12.0x
2.1x
Deere & Company (DE)
2.1x
13.8x
13.8x
3.8x
Median
1.0x
9.8x
13.6x
2.4x
Implied Price
25.7
42.3
36.0
24.6
Equally weighted average price per share: $32.2
Company
Overview
Macroeconomic
Overview
Financial
Analysis
Technical
Analysis
Projection
&
Valuation
Recomm
endation
Recommendation
Industry
Factor
Revenue
Projection
DCF
Valuation
Comparable
Valuation
Sell 100 shares @market price
SELL
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