Sunday, December 18, 2005

Methode Electronics (METH)

Methode (METH) receives about 75% of its revenues from automotive electronics, switches and connectors for the steering column as well as instrument panels. Non-automotive business focuses on telecom and network markets and produces PC cards and poly-optic connectors. Since the bulk of the business is auto OEM's, METH has been weak.

The stock hit another new low on Friday following downward guidance for earnings and revenues announced on December 8th. Currently, the business is trading on a Enterprise Value/EBITDA ratio of about 4.8 times. The balance sheet carries zero long-term debt and about $2.10 per share in cash. There are no post-retirement liabilities. The risk is that most of the revenues are tied to domestic OEM producers with significant programs on F-150, Explorer, Grand Cherokee, Dakota, Ram pickups, and Chrysler minivans. The company has added Honda as a customer.

The business has a return on invested capital of just under 10% for the last 12 months. Operating profits which had been in a downtrend since the late 90's have been improving. CFFO has improved significantly as working capital appears to be under better control.

The stock has addressed many corporate governance concerns with a single class of stock. A director has purchased a small amount of stock recently. This stock appears to be trading significantly below both other electronics companies as well as auto parts companies on most cash flow measures.


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