Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Methode Electronics, Inc. (NYSE:MEI) manufactures component and
subsystems devices for original equipment manufacturers (OEMs). MEI primarily
sells to General Motors (49.5%) and Ford (11.5%).
• MEI’s automotive sales have
declined due to lower sales volumes in Europe and with Ford.
• Sales to GM have been
decreasing, while F-series production cuts have lowered sales volumes to Ford.
• Dabir technology has been used
in thousands of surgeries and continues to show potential for future growth.
• Doug Koman, former CFO of
Methode, retired during Q1 2017. John Hrudicka has taken over as CFO and brings
a wealth of experience within the manufacturing industry.
Key
points:
In comparison to Q1 2016, gross
margins improved 180 bps in Q1 2017. However, operating margin was 13.9% in Q1
2017, which is greater than management’s FY17 operating margin guidance (12.4%
to 13.8%). This suggests that management anticipates a tightening operating
margin over the next three quarters.
Automotive sales declined by 3.9%
in Q1 2016 relative to the same quarter of the previous year. The decrease was
mostly attributable to lower sales volumes in Europe, as well as decreased
center console sales to Ford.
Within their automotive segment, MEI’s
sales to their main customers have been trending in different directions. In
FY15, GM represented 44.8% of the company’s revenues, while Ford comprised
12.8% revenues. On the other hand, in FY16, GM and Ford totaled 49.5% and
11.5%, respectively. Similarly, in Q1 2017 sales volumes to GM increased, which
was offset by declining sales to Ford. It is beginning to look like the company
will rely more heavily on their two main customers in the future. In their most
recent earnings calls, Methode announced they were awarded a six-year program
for the overhead console for Ford’s SUV and an extension to their global
platform integrated tailgate modules. Combined the two programs are expected to
bring in an additional $15 million of revenue beginning in 2019.
In MEI’s interface segment,
management has significantly reduced their revenue guidance for their 10-gig
product. Anticipated FY17 revenue has been decreased from $9 million to a range
of $2-$3 million. Methode’s interface margins have expanded by 230 bps, which
was mostly attributed to favorable currency rates.
Through Q1 2017, Methode’s Dabir
technology had been used in more than 4,500 surgeries. Recently, MEI presented
their technology at October’s Symposium on Advanced Wound Care or SAWC in Las
Vegas. Following the presentation, the technology will be evaluated in several
studies and clinical trials to determine the effectiveness of Dabir Surfaces on
prevention and treatment of pressure ulcers. According to President and Chief
Executive Officer, Donald W. Duda, Methode has begun designing and engineering
activities, “to develop a post-acute specific Dabir surface and controller
designed to meet the demands of this high-volume market segment.”
During Q1 2017, Doug Koman
retired as Chief Financial Officer. Mr. Koman will remain working with the
company in some capacity as he transitions into retirement. Also, Methode
announced John Hrudicka as the new CFO. Mr. Hrudicka has several years of
experience as CFO for two manufacturing businesses – Titan International and
Elkay Manufacturing.
What
has the stock done lately?
Since being added to the AIM
Equity Fund in April 2016, MEI’s stock price has increased 17.4%. MEI had risen
to as high as $37.00 in late August but took a hit following Ford’s
announcement of F-series production cuts. Relative to its peers, Methode’s
stock was most impacted by Ford’s announcement, however, the company has
rebounded and is approaching its pre-announcement value.
Past
Year Performance: MEI has
decreased 3.63% in value over the past year. The stock has been quite volatile
for the majority of the last twelve months. Over the last year, the stock has
been as high as $37.04 in December 2015 and as low as $24.80 in January 2016. MEI’s
poor performance correlates to the decreasing stock prices of its major
customers – GM and Ford. Even though both automakers have struggled in the past
year, MEI has been able to stabilize the value of their company.
Source: FactSet
My
Takeaway
Despite recent F-series
production cuts, Methode has rebounded and continues to show growth potential.
The company has been a top performer in our Equity Fund’s technology sector. I
believe the company is well-positioned to further improve its footprint in the
automotive industry and be awarded additional projects with GM and Ford. Also,
MEI’s Dabir Surfaces provides the company with the opportunity to diversify its
portfolio of products. Being less dependent on one industry will give MEI
stability in the future.
