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Does Methode Electronics Have Room Left to Run?

GuruFocus.com
·2 min read

- By Nicholas Kitonyi

Shares of U.S. electronics components company Methode Electronics Inc. (NYSE:MEI) are up nearly 60% over the last three months. However, the company's stock has yet to fully recover from the decline experienced earlier in the year. It is down 2.89% year to date.

Does Methode Electronics Have Room Left to Run?
Does Methode Electronics Have Room Left to Run?


This suggests that despite the stock's current rally, there could be room left to run going into the new year. And at a trailing 12-month price-earnings ratio of about 11.15, the stock could be modestly undervalued based on Peter Lynch's fair valuation of 15.

A look at the numbers

Methode reported its fiscal second-quarter 2021 results at the beginning of December. Net sales were $300.8 million, up from $257.2 million reported in the same period a year ago. The company's GAAP earnings per share of $1.01 included 16 cents from other items.

Methode provided top-line guidance of $265 million to $285 million for the third quarter and diluted earnings in the range of 69 cents to 85 cents per share. The company's top line has grown consistently over the last four years while its bottom line has improved in each of the last two years.

The company appears to be on a strong growth trajectory despite the challenges presented by the Covid-19 pandemic. However, its debt has grown significantly over the last 12 months, which creates leverage risk. Its current ratio of 3.43 is significantly high compared to close peer CTS Corp.'s (NYSE:CTS) multiple of 2.77 and OSI Systems Inc.'s (NASDAQ:OSIS) equivalent of 1.84.

Nonetheless, shareholders of the company will be looking at its current dividend yield of about 1.16% at a payout ratio of just 12.79% as an added incentive to keep hold of the stock. In comparison, OSI Systems is currently not paying any dividends while CTS's dividend yield is 0.46 despite having a slightly higher payout ratio of 17.58%.

Valuation

From a valuation perspective, Methode also looks attractively valued with a trailing price-earnings ratio of 11.15 compared to OSI System's equivalent of 26.91 and CTS's 37.03. This again supports the argument that the company's stock may still have room to run despite its current rally.

In summary, shares of Methode appear to be trading below the Peter Lynch earnings line, which suggests a potential case of undervaluation. The company's stock also looks relatively undervalued compared to peers. However, its gearing risk is also higher, which could be a drawback for investors looking for long-term opportunities.

Disclosure: No positions in the stocks mentioned.

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This article first appeared on GuruFocus.