Methode Electronics: Poised To Find The Light In An Improving Automotive Sector

Investment Thesis - Methode Electronics is undervalued due to its heavy reliance on the automotive industry, which has seen a 70% stock price decline over the past year, but the company is positioned to benefit from the transition to electric vehicles (EVs) [2][4][7] Company Overview - Methode Electronics provides mechatronic solutions across three main segments: Automotive (62% of revenue), Industrial (33%), and Interface (5%) [3] - The company has discontinued its Medical segment, which historically represented about 0.4% of net sales [3] Market Conditions - A slowdown in manufacturing activity and price inflation, particularly due to global supply shocks like the chip shortage, has negatively impacted Methode's performance [4][5] - For the nine months ended January 27, 2024, net sales were down 4.7% overall, with a 15.5% decline when excluding acquisitions and favorable currency translations [4] Automotive Segment Performance - The automotive segment experienced a 17.76% decline in net sales for the nine months ended January 27, 2024, with operating income decreasing to a loss of $75.3 million [7] - The slowdown in the automotive industry is attributed to labor strikes, supply shocks, and a weak economy, leading to fewer new programs launched by automotive manufacturers [5][7] Recovery Strategy - Methode's recovery strategy includes both organic growth opportunities in data centers and inorganic growth through acquisitions, such as Nordic Lights, which has contributed $63.3 million to net sales [8][7] - The transition to EVs is expected to create long-term growth opportunities, with EV programs already representing about 20% of net sales [7][8] Financial Performance and Valuation - Methode is trading below the median price-to-book (P/B) and enterprise value-to-sales (EV/Sales) ratios compared to peers, indicating it may be undervalued [9] - A discounted cash flow (DCF) analysis suggests a valuation range of $28.49 to $57.03 per share, representing a potential upside of 142% from current levels [10][11] Management and Operational Challenges - The company is undergoing management reorganization after the retirement of long-time CEO Donald Duda, with interim leadership focusing on restoring profitability [5][4] - Operational inefficiencies and increased interest expenses due to a breach of debt covenants pose challenges to the company's recovery efforts [12]