2023-07-18 07:37:15 ET
Summary
- MEI reported Q4 FY23 net sales of $301.2 million, a 4.3% increase from Q4 FY22, largely due to increased sales in its industrial and interface segments.
- MEI's FY23 net sales were $1.1 billion, a 1.3% rise from FY22, but net income declined by 24.5% due to costs associated with the Nordic Lights acquisition and material and labor inflation.
- The company is currently overvalued and under selling pressure, with a hold rating assigned due to expected stagnant revenue growth.
Methode Electronics (MEI) produces mechatronic products. They work in four segments: Industrial, Medical, Interface, and Automotive. In the industrial segment, they manufacture lighting solutions and braided flexible cables. In the medical segment, they provide dabir surfaces, a technology designed to avoid pressure injuries. They offer various copper-based transceivers and user interface solutions in the interface segment. In the automotive segment, they supply electro-mechanical devices and transmission lead-frames. MEI announced its Q4 FY23 and FY23 results. I will analyze its financial results and technical chart in this report. I assign a hold rating on MEI as I believe it is overvalued.
Financial Analysis
MEI posted its Q4 FY23 and FY23 results . The net sales for Q4 FY23 were $301.2 million, a rise of 4.3% compared to Q4 FY22. I believe the main reason behind the revenue rise was increased sales in its industrial and interface segments. The net sales in the industrial segment increased by 24.2% in Q4 FY23 compared to Q4 FY22. I believe the strength in EV power distribution and lighting for commercial vehicles was the main reason behind the revenue rise in the industrial segment. The net sales in the interface segment grew by 13.6% in Q4 FY23 compared to Q4 FY22. I believe the strong demand for its digital data products was the main reason behind the revenue rise in the interface segment. The net income for Q4 FY23 was $8.1 million, which was $16.2 million in Q4 FY22. I believe the adverse foreign exchange impact impacted their net income, and acquisition costs also led to a decline in the net income.
The net sales for FY23 were $1.1 billion, a rise of 1.3% compared to FY22, and if we exclude the impact of foreign currency translation, the rise was 6.3%. I believe increased revenue from its industrial segment was the main reason behind the revenue rise. Their operating income margin for FY23 was 7.6% which was 9.6% in FY22. I believe the decline in operating margin was mainly due to material and labor inflation. The net income for FY23 was $77.1 million, a decline of 24.5% compared to FY22. I believe the decline was mainly due to the Nordic Lights acquisitions costs. In my opinion, the financial performance of MEI was decent. The revenue growth was modest, but foreign currency translation had a big impact on it which I believe is not a major issue; talking about the decline in the net income, as I told the decline was mainly due to the Nordic Lights acquisition, so I think the decline is not much of an issue. But the only problem that I have is the decline in its margins. In FY23, its margins were heavily affected by the material and labor inflation, and the management has stated that the material inflation headwind will continue to affect them. So I think their operating margins might continue to remain under pressure in FY24. In addition, the company expects its FY24 revenue to be around $1.16 billion, which is lower than its FY23 revenue. Hence, looking at its expected stagnant revenue growth and pressure on its operating margin. I won't be comfortable investing in it for now. Hence, based on its financial, I assign a hold rating on MEI.
Technical Analysis
MEI is trading at the $33.2 level. The size of the recent red candles is huge, which indicates selling pressure is present in the stock, and huge volumes back the selling. The volumes recorded in the recent red candles are the highest in the last seven years, which shows weakness. In addition, it has also breached its 200 ema and the support zone of $34, which is a matter of concern. In my opinion, one should avoid trading in MEI till we see some signs of recovery, but the current price action indicates that the stock might fall further. The next support zone for the stock is at $25, so I believe there is a high chance that it might reach $25 in the coming times. Hence, I would advise to stay away from it.
Should One Invest In MEI?
Talking about MEI's valuation. Mei has a PEG [FWD] ratio of 2.07x compared to the sector ratio of 1.96x, and MEI is currently trading at a P/E [TTM] ratio of 16x which is higher than its five-year average P/E ratio of 12.92x. So based on the PEG ratio, which is an important ratio that considers a company's expected earnings growth, and based on its historical averages, I believe MEI is overvalued.
Hence looking at its valuation and analyzing its financials and technicals, and looking at its future growth rate. I think it is not worth investing in MEI right now. We can consider investing in it once the headwind of material costs starts to diminish and we see positive revenue growth in the coming quarters. But until then, I think one should ignore it because I think it might not be able to provide returns to its investors. Hence, I assign a hold rating on MEI.
Risk
Approximately 49% of MEI's consolidated net revenues in fiscal 2023 came from its top five clients. At 18.7% and 10.8%, two clients made up more than 10% of the automotive segment's total net sales. Sales to these customers can occasionally be centered around a single product. Instead of manufacturing a certain number of products, the agreements with its key clients typically provide for meeting their requirements for certain models. These supply agreements cover a time frame ranging from one year to the model's life, typically three to seven years. Its sales may drop and negatively impact its financial situation if one of its key clients leaves or if production levels for those clients or certain models decline.
Bottom Line
Their operating margins were under pressure in FY23, and I expect their margins might continue to remain under pressure in FY24. In addition, the technical chart indicates selling pressure is present in the stock, and I believe it is overvalued. Hence, I assign a hold rating on MEI.
For further details see:
Methode Electronics: Operating Margin Is Under Pressure