Custom-engineered solutions manufacturer Methode Electronics (NYSE:MEI) missed Wall Street’s revenue expectations in Q4 CY2024, with sales falling 7.6% year on year to $239.9 million. Next quarter’s revenue guidance of $247.5 million underwhelmed, coming in 15.4% below analysts’ estimates. Its non-GAAP loss of $0.21 per share was significantly below analysts’ consensus estimates.
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Revenue: $239.9 million vs analyst estimates of $263.4 million (7.6% year-on-year decline, 8.9% miss)
Adjusted EPS: -$0.21 vs analyst estimates of -$0.08 (significant miss)
Adjusted EBITDA: $12.3 million vs analyst estimates of $21.26 million (5.1% margin, 42.1% miss)
Revenue Guidance for Q1 CY2025 is $247.5 million at the midpoint, below analyst estimates of $292.7 million
Operating Margin: -0.9%, in line with the same quarter last year
Free Cash Flow Margin: 8.2%, up from 4.7% in the same quarter last year
Market Capitalization: $341.9 million
Management CommentsPresident and Chief Executive Officer Jon DeGaynor said, “Our journey to transform Methode is well underway. Our actions to improve execution, while still in an early phase, positively impacted our financial results but were partially masked by challenging market headwinds. Although we had a strong quarter for our power product sales into data center applications, they were more than offset by the overall weakness in the auto market and the slowing of new EV program ramp-ups. Despite the lower overall sales, our gross profit was higher than the prior year, as we began to realize benefits from the transformation actions like lower scrap and premium freight costs. At the operating line, despite the notable drop in sales, our loss improved from the prior year and demonstrated that our actions have clearly lowered the breakeven sales point for the company. Lastly, we returned to generating positive free cash flow, in part due to our actions on accounts receivable and inventory levels.”
Founded in 1946, Methode Electronics (NYSE:MEI) is a global supplier of custom-engineered solutions for Original Equipment Manufacturers (OEMs).
Like many equipment and component manufacturers, electrical systems companies are buoyed by secular trends such as connectivity and industrial automation. More specific pockets of strong demand include Internet of Things (IoT) connectivity and the 5G telecom upgrade cycle, which can benefit companies whose cables and conduits fit those needs. But like the broader industrials sector, these companies are also at the whim of economic cycles. Interest rates, for example, can greatly impact projects that drive demand for these products.
Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Methode Electronics struggled to consistently increase demand as its $1.07 billion of sales for the trailing 12 months was close to its revenue five years ago. This wasn’t a great result and is a sign of poor business quality.
Methode Electronics Quarterly Revenue
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Methode Electronics’s recent history shows its demand remained suppressed as its revenue has declined by 4.3% annually over the last two years. Methode Electronics isn’t alone in its struggles as the Electrical Systems industry experienced a cyclical downturn, with many similar businesses observing lower sales at this time.
Methode Electronics Year-On-Year Revenue Growth
This quarter, Methode Electronics missed Wall Street’s estimates and reported a rather uninspiring 7.6% year-on-year revenue decline, generating $239.9 million of revenue. Company management is currently guiding for a 10.7% year-on-year decline in sales next quarter.
Looking further ahead, sell-side analysts expect revenue to grow 6.3% over the next 12 months. While this projection indicates its newer products and services will fuel better top-line performance, it is still below the sector average.
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Methode Electronics was profitable over the last five years but held back by its large cost base. Its average operating margin of 7.2% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.
Analyzing the trend in its profitability, Methode Electronics’s operating margin decreased by 15.4 percentage points over the last five years. Methode Electronics’s performance was poor no matter how you look at it – it shows that costs were rising and it couldn’t pass them onto its customers.
In Q4, Methode Electronics’s breakeven margin was in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.
We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.
Sadly for Methode Electronics, its EPS declined by 17.1% annually over the last five years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.
We can take a deeper look into Methode Electronics’s earnings to better understand the drivers of its performance. As we mentioned earlier, Methode Electronics’s operating margin was flat this quarter but declined by 15.4 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.
Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.
For Methode Electronics, its two-year annual EPS declines of 50.5% show it’s continued to underperform. These results were bad no matter how you slice the data.
In Q4, Methode Electronics reported EPS at negative $0.21, up from negative $0.33 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates. Over the next 12 months, Wall Street is optimistic. Analysts forecast Methode Electronics’s full-year EPS of negative $0.61 will flip to positive $0.67.
We struggled to find many positives in these results. Its revenue guidance for next quarter missed significantly and its revenue, EPS, and EBITDA fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 15% to $8.35 immediately following the results.
The latest quarter from Methode Electronics’s wasn’t that good. One earnings report doesn’t define a company’s quality, though, so let’s explore whether the stock is a buy at the current price. The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.
