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While Methode Electronics, Inc. (NYSE:MEI) might not be the most widely known stock at the moment, it saw a decent share price growth in the teens level on the NYSE over the last few months. As a small cap stock, hardly covered by any analysts, there is generally more of an opportunity for mispricing as there is less activity to push the stock closer to fair value. Is there still an opportunity here to buy? Today I will analyse the most recent data on Methode Electronics’s outlook and valuation to see if the opportunity still exists.
What is Methode Electronics worth?
The share price seems sensible at the moment according to my price multiple model, where I compare the company's price-to-earnings ratio to the industry average. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that Methode Electronics’s ratio of 13.95x is trading slightly below its industry peers’ ratio of 18.89x, which means if you buy Methode Electronics today, you’d be paying a decent price for it. And if you believe that Methode Electronics should be trading at this level in the long run, then there’s not much of an upside to gain over and above other industry peers. So, is there another chance to buy low in the future? Given that Methode Electronics’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us an opportunity to buy later on. This is based on its high beta, which is a good indicator for share price volatility.
What kind of growth will Methode Electronics generate?
Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company's future expectations. However, with a relatively muted revenue growth of 9.3% expected over the next couple of years, growth doesn’t seem like a key driver for a buy decision for Methode Electronics, at least in the short term.
What this means for you:
Are you a shareholder? It seems like the market has already priced in MEI’s growth outlook, with shares trading around industry price multiples. However, there are also other important factors which we haven’t considered today, such as the financial strength of the company. Have these factors changed since the last time you looked at MEI? Will you have enough conviction to buy should the price fluctuate below the the industry PE ratio?
Are you a potential investor? If you’ve been keeping an eye on MEI, now may not be the most advantageous time to buy, given it is trading around industry price multiples. However, the positive growth outlook may mean it’s worth diving deeper into other factors in order to take advantage of the next price drop.
So while earnings quality is important, it's equally important to consider the risks facing Methode Electronics at this point in time. While conducting our analysis, we found that Methode Electronics has 1 warning sign and it would be unwise to ignore this.
If you are no longer interested in Methode Electronics, you can use our free platform to see our list of over 50 other stocks with a high growth potential.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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