Methode Electronics has been on fire lately. In the past six months alone, the company’s stock price has rocketed 125%, setting a new 52-week high of $15.60 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Methode Electronics, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Methode Electronics Will Underperform?
We’re happy investors have made money, but we’re cautious about Methode Electronics. Here are three reasons why there are better opportunities than MEI, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Methode Electronics’s demand was weak over the last five years as its sales fell at a 1.3% annual rate. This wasn’t a great result and is a sign of poor business quality.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Methode Electronics, its EPS declined by 18.6% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
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.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Methode Electronics, we’ll be cheering from the sidelines. After the recent rally, the stock trades at 46.4× forward P/E (or $15.60 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. Let us point you toward one of our all-time favorite software stocks.
Stocks We Would Buy Instead of Methode Electronics
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