Methode Electronics (MEI)

Custom-engineered solutions manufacturer Methode Electronics (NYSE:MEI) announced better-than-expected revenue in Q2 CY2025, but sales fell by 7% year on year to $240.5 million. The company’s full-year revenue guidance of $950 million at the midpoint came in 2.6% above analysts’ estimates. Its non-GAAP loss of $0.22 per share was 12% above analysts’ consensus estimates.

Company Overview

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.

Competitors of Methode Electronics include Amphenol Corporation (NYSE: APH), TE Connectivity Ltd. (NYSE: TEL), and Molex Incorporated (NASDAQ: MOLX).

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Methode Electronics’s sales grew at a sluggish 1.7% compounded annual growth rate over the last five years. This was below our standards and is a rough starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Methode Electronics’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 6.8% annually. 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.

This quarter, Methode Electronics’s revenue fell by 7% year on year to $240.5 million but beat Wall Street’s estimates by 10.8%.

Looking ahead, sell-side analysts expect revenue to decline by 8.2% over the next 12 months, similar to its two-year rate. This projection doesn't excite us and implies its products and services will face some demand challenges.

Methode Electronics has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 20.4% gross margin over the last five years. Said differently, Methode Electronics had to pay a chunky $79.60 to its suppliers for every $100 in revenue.

In Q2, Methode Electronics produced a 18.1% gross profit margin, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Methode Electronics was profitable over the last five years but held back by its large cost base. Its average operating margin of 5.6% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.

Looking at the trend in its profitability, Methode Electronics’s operating margin decreased by 14.6 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. 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.

This quarter, Methode Electronics’s breakeven margin was up 3.1 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

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 19% annually over the last five years while its revenue grew by 1.7%. This tells us the company became less profitable on a per-share basis as it expanded due to non-fundamental factors such as interest expenses and taxes.

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 expanded this quarter but declined by 14.6 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; interest expenses and taxes 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 63.7% show it’s continued to underperform. These results were bad no matter how you slice the data.

In Q2, Methode Electronics reported adjusted EPS of negative $0.22, up from negative $0.31 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street is optimistic. Analysts forecast Methode Electronics’s full-year EPS of negative $1.06 will flip to positive $0.04.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Methode Electronics has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 5.3%, subpar for an industrials business.

Taking a step back, we can see that Methode Electronics’s margin dropped by 11.6 percentage points during that time. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s in the middle of a big investment cycle.

Methode Electronics’s free cash flow clocked in at $18 million in Q2, equivalent to a 7.5% margin. Its cash flow turned positive after being negative in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Methode Electronics historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5.4%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Methode Electronics’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Methode Electronics reported $121.1 million of cash and $347.6 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $47.6 million of EBITDA over the last 12 months, we view Methode Electronics’s 4.8× net-debt-to-EBITDA ratio as safe. We also see its $10.3 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Methode Electronics blew past analysts’ EBITDA expectations this quarter. We were also excited its revenue outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this was a good print with some key areas of upside. The stock traded up 9.5% to $8.20 immediately following the results.

Updated: November 7, 2025 at 10:30 PM EST

Before deciding whether to buy Methode Electronics or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

Methode Electronics doesn’t pass our quality test. To kick things off, its revenue growth was weak over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, its declining EPS over the last five years makes it a less attractive asset to the public markets.

Methode Electronics’s EV-to-EBITDA ratio based on the next 12 months is 2.9x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $10.25 on the company (compared to the current share price of $6.63).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.