Monday, November 14, 2016

A current AIM holding: Methode Electronics (MEI) by Nick Dykema. "As auto sales go, so goes Methode Electronics?"

Methode Electronics, Inc. (MEI, $32.90): “Will Methode Continue Driving Forward?” By: Nick Dykema, AIM Student at Marquette University
Image result for Methode Electronics logo

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.


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.