Methode Electronics, a provider of UI and LED systems, power distribution/sensor applications, and data processors/transceivers, has faced the brunt of a 70% stock price decline attributed to its heavy reliance on the automotive industry.
Despite this, the company stands to benefit from the ongoing transition to electric vehicles (EVs), positioning itself for long-term success.
Company Overview
Methode Electronics engineers mechatronic solutions across various applications for OEMs. Its three main segments are Interface, Industrial, and Automotive. The company recently discontinued its Medical segment, which accounted for only about 0.4% of net sales.
The Interface segment offers copper transceivers for cloud computing and telecommunication equipment, user interface solutions, and sensors.
The Industrial segment provides external lighting solutions and cabling systems for aerospace, commercial vehicles, and construction equipment. The Automotive segment, Methode’s largest, supplies electronic and electro-mechanical solutions to automobile OEMs.
Challenges and Performance
Global supply shocks, including the chip shortage, coupled with a slowdown in manufacturing activity, have impacted Methode’s revenue. Net sales for the nine months ended January 27, 2024, were down 4.7% overall, with a 7.4% decline in the third quarter.
Excluding the Nordic Lights acquisition and favorable currency translations, sales dropped by approximately 15% for the quarter.
Expenses and Supply Chain Risks
With 52% of its business conducted outside of North America, Methode faces inherent supply chain risks exacerbated by crises like the Red Sea and Suez Canal blockage and the Russian-Ukraine war.
Limited pricing power due to contract-based competition makes cost recovery challenging. The company is undergoing management restructuring, with Kevin Nystrom and David Rawden from AlixPartners serving as interim CEO and CFO, respectively, to restore profitability.
Automotive Industry Impact
The automotive segment, Methode’s largest, has been negatively affected by labor strikes, supply shocks, and economic weakness, resulting in fewer new program launches and reduced revenue opportunities.
Net sales in this segment were down 17.76% for the nine months ended January 27, 2024, leading to an operating loss of $75.3 million.
Recovery and Growth Opportunities
Methode’s recovery strategy involves organic growth in data centers and commercial vehicles, alongside inorganic growth through strategic acquisitions. With the anticipated economic recovery, the automotive segment is expected to improve, driven by growing EV demand, which currently accounts for about 20% of net sales. Acquisitions like Nordic Lights enhance Methode’s portfolio and market presence.
Financial Performance and Valuation
Although trading below median P/B and EV/Sales ratios for its peers, Methode matches or surpasses them in operating performance metrics over ten-year averages. A DCF analysis values the company between $28.49 and $57.03 per share, indicating an undervalued asset despite current fiscal year losses.
Risks and Company’s Dependence on Automotive Sector
The company’s dependence on the automotive sector and operational inefficiencies pose significant risks. Breaching debt covenants or deteriorating creditworthiness could hinder acquisitions. Management restructuring and consulting fees add complexity.
However, Methode Electronics remains positioned for long-term growth and shareholder value return, contingent on automotive industry and broader manufacturing sector recovery.
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Dean is a freelance content writer who contributes to various Digital Media Companies and independent websites all over the world. He has over 20 years of financial industry experience, so it’s safe to say he’s well informed.
