Methode Electronics (MEI)

Custom-engineered solutions manufacturer Methode Electronics (NYSE:MEI) announced better-than-expected revenue in Q1 CY2025, but sales fell by 7.3% year on year to $257.1 million. On the other hand, the company’s full-year revenue guidance of $950 million at the midpoint came in 9.1% below analysts’ estimates. Its non-GAAP loss of $0.77 per share was significantly below 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 sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Methode Electronics struggled to consistently increase demand as its $1.05 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.

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 performance shows its demand remained suppressed as its revenue has declined by 5.7% 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.

This quarter, Methode Electronics’s revenue fell by 7.3% year on year to $257.1 million but beat Wall Street’s estimates by 12.4%.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months. While this projection suggests its newer products and services will spur better top-line performance, it is still below the sector average.

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 20.6% gross margin over the last five years. That means Methode Electronics paid its suppliers a lot of money ($79.37 for every $100 in revenue) to run its business.

This quarter, Methode Electronics’s gross profit margin was 7.6%, down 5.5 percentage points year on 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.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Methode Electronics was profitable over the last five years but held back by its large cost base. Its average operating margin of 6% 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 15.2 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 Q1, Methode Electronics generated an operating margin profit margin of negative 9.2%, down 6 percentage points year on year. Since Methode Electronics’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for Methode Electronics, its EPS declined by 18.8% 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 declined by 15.2 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 59.8% show it’s continued to underperform. These results were bad no matter how you slice the data.

In Q1, Methode Electronics reported EPS at negative $0.77, down from negative $0.23 in the same quarter last 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 $1.15 will flip to positive $0.67.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and 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 5.2%, subpar for an industrials business.

Taking a step back, we can see that Methode Electronics’s margin dropped by 15.7 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 $26.3 million in Q1, equivalent to a 10.2% margin. This result was good as its margin was 4.5 percentage points higher than 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 are more important.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared 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 6%, 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. Unfortunately, Methode Electronics’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Methode Electronics burned through $15.2 million of cash over the last year, and its $343.2 million of debt exceeds the $103.6 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Methode Electronics’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Methode Electronics until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

We were impressed by how significantly Methode Electronics blew past analysts’ revenue expectations this quarter. On the other hand, its EPS and EBITDA missed along with its full-year revenue and EBITDA guidance. Overall, this was a weaker quarter. The stock traded down 11.2% to $9.13 immediately after reporting.

Updated: July 10, 2025 at 11:21 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Methode Electronics, you should also grasp the company’s longer-term business quality and valuation.

We cheer for all companies making their customers lives easier, but in the case of Methode Electronics, we’ll be cheering from the sidelines. For starters, its revenue growth was weak over the last five years, and analysts don’t see anything changing 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 P/E ratio based on the next 12 months is 11.6x. This valuation multiple is fair, but we don’t have much confidence in the company. There are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $10.50 on the company (compared to the current share price of $7.89).

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.