Intrinsic value of Methode Electronics - MEI

Previous Close

$45.30

  Intrinsic Value

$36.10

stock screener

  Rating & Target

sell

-20%

  Value-price divergence*

-6%

Previous close

$45.30

 
Intrinsic value

$36.10

 
Up/down potential

-20%

 
Rating

sell

 
Value-price divergence*

-6%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of MEI stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2017), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.7

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2017(a)
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  0.99
  3.30
  3.47
  3.62
  3.76
  3.88
  4.00
  4.10
  4.19
  4.27
  4.34
  4.41
  4.47
  4.52
  4.57
  4.61
  4.65
  4.68
  4.72
  4.74
  4.77
  4.79
  4.81
  4.83
  4.85
  4.86
  4.88
  4.89
  4.90
  4.91
  4.92
Revenue, $m
  817
  844
  873
  905
  939
  975
  1,014
  1,056
  1,100
  1,147
  1,197
  1,250
  1,305
  1,364
  1,427
  1,493
  1,562
  1,635
  1,712
  1,794
  1,879
  1,969
  2,064
  2,164
  2,269
  2,379
  2,495
  2,617
  2,745
  2,880
  3,022
Variable operating expenses, $m
 
  729
  754
  782
  811
  843
  876
  912
  950
  991
  1,034
  1,079
  1,128
  1,179
  1,232
  1,289
  1,349
  1,412
  1,479
  1,549
  1,623
  1,701
  1,783
  1,869
  1,960
  2,055
  2,155
  2,260
  2,371
  2,488
  2,610
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  706
  729
  754
  782
  811
  843
  876
  912
  950
  991
  1,034
  1,079
  1,128
  1,179
  1,232
  1,289
  1,349
  1,412
  1,479
  1,549
  1,623
  1,701
  1,783
  1,869
  1,960
  2,055
  2,155
  2,260
  2,371
  2,488
  2,610
Operating income, $m
  111
  115
  119
  123
  128
  133
  138
  144
  150
  156
  163
  170
  178
  186
  194
  203
  213
  223
  233
  244
  256
  268
  281
  295
  309
  324
  340
  357
  374
  392
  412
EBITDA, $m
  135
  136
  140
  145
  151
  157
  163
  170
  177
  184
  192
  201
  210
  219
  229
  240
  251
  263
  275
  288
  302
  316
  332
  348
  364
  382
  401
  420
  441
  463
  485
Interest expense (income), $m
  0
  1
  1
  1
  2
  2
  2
  2
  3
  3
  3
  4
  4
  4
  5
  5
  6
  6
  7
  7
  8
  8
  9
  10
  10
  11
  12
  13
  14
  14
  15
Earnings before tax, $m
  116
  114
  118
  122
  126
  131
  136
  141
  147
  153
  160
  167
  174
  182
  190
  198
  207
  217
  227
  237
  248
  260
  272
  285
  299
  313
  328
  344
  360
  378
  396
Tax expense, $m
  23
  31
  32
  33
  34
  35
  37
  38
  40
  41
  43
  45
  47
  49
  51
  53
  56
  58
  61
  64
  67
  70
  73
  77
  81
  85
  89
  93
  97
  102
  107
Net income, $m
  93
  83
  86
  89
  92
  96
  99
  103
  107
  112
  117
  122
  127
  133
  138
  145
  151
  158
  165
  173
  181
  190
  199
  208
  218
  229
  239
  251
  263
  276
  289

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  294
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  704
  423
  438
  454
  471
  489
  509
  530
  552
  576
  601
  627
  655
  685
  716
  749
  784
  820
  859
  900
  943
  988
  1,036
  1,086
  1,138
  1,194
  1,252
  1,313
  1,377
  1,445
  1,516
Adjusted assets (=assets-cash), $m
  410
  423
  438
  454
  471
  489
  509
  530
  552
  576
  601
  627
  655
  685
  716
  749
  784
  820
  859
  900
  943
  988
  1,036
  1,086
  1,138
  1,194
  1,252
  1,313
  1,377
  1,445
  1,516
Revenue / Adjusted assets
  1.993
  1.995
  1.993
  1.993
  1.994
  1.994
  1.992
  1.992
  1.993
  1.991
  1.992
  1.994
  1.992
  1.991
  1.993
  1.993
  1.992
  1.994
  1.993
  1.993
  1.993
  1.993
  1.992
  1.993
  1.994
  1.992
  1.993
  1.993
  1.993
  1.993
  1.993
Average production assets, $m
  100
  103
  107
  110
  115
  119
  124
  129
  134
  140
  146
  152
  159
  166
  174
  182
  191
  199
  209
  219
  229
  240
  252
  264
  277
  290
  304
  319
  335
  351
  369
Working capital, $m
  406
  116
  120
  124
  129
  134
  139
  145
  151
  157
  164
  171
  179
  187
  195
  204
  214
  224
  235
  246
  257
  270
  283
  296
  311
  326
  342
  359
  376
  395
  414
Total debt, $m
  27
  33
  38
  45
  52
  59
  67
  75
  84
  93
  103
  114
  125
  136
  149
  162
  176
  191
  206
  222
  239
  257
  276
  296
  317
  339
  362
  387
  412
  439
  467
Total liabilities, $m
  163
  169
  174
  181
  188
  195
  203
  211
  220
  229
  239
  250
  261
  272
  285
  298
  312
  327
  342
  358
  375
  393
  412
  432
  453
  475
  498
  523
  548
  575
  603
Total equity, $m
  541
  255
  264
  273
  284
  295
  306
  319
  332
  346
  362
  377
  394
  412
  431
  451
  472
  494
  517
  542
  568
  595
  623
  654
  685
  719
  754
  790
  829
  870
  913
Total liabilities and equity, $m
  704
  424
  438
  454
  472
  490
  509
  530
  552
  575
  601
  627
  655
  684
  716
  749
  784
  821
  859
  900
  943
  988
  1,035
  1,086
  1,138
  1,194
  1,252
  1,313
  1,377
  1,445
  1,516
Debt-to-equity ratio
  0.050
  0.130
  0.150
  0.160
  0.180
  0.200
  0.220
  0.230
  0.250
  0.270
  0.280
  0.300
  0.320
  0.330
  0.350
  0.360
  0.370
  0.390
  0.400
  0.410
  0.420
  0.430
  0.440
  0.450
  0.460
  0.470
  0.480
  0.490
  0.500
  0.500
  0.510
Adjusted equity ratio
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602
  0.602

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  93
  83
  86
  89
  92
  96
  99
  103
  107
  112
  117
  122
  127
  133
  138
  145
  151
  158
  165
  173
  181
  190
  199
  208
  218
  229
  239
  251
  263
  276
  289
Depreciation, amort., depletion, $m
  24
  21
  22
  22
  23
  24
  25
  26
  27
  28
  29
  30
  32
  33
  35
  36
  38
  40
  42
  44
  46
  48
  50
  53
  55
  58
  61
  64
  67
  70
  74
Funds from operations, $m
  164
  104
  107
  111
  115
  120
  124
  129
  134
  140
  146
  152
  159
  166
  173
  181
  189
  198
  207
  217
  227
  238
  249
  261
  273
  287
  300
  315
  330
  346
  363
Change in working capital, $m
  19
  4
  4
  4
  5
  5
  5
  6
  6
  6
  7
  7
  8
  8
  9
  9
  10
  10
  11
  11
  12
  12
  13
  14
  14
  15
  16
  17
  18
  18
  19
Cash from operations, $m
  145
  100
  103
  107
  111
  115
  119
  123
  128
  134
  139
  145
  151
  158
  165
  172
  180
  188
  197
  206
  215
  225
  236
  247
  259
  271
  284
  298
  313
  328
  344
Maintenance CAPEX, $m
  0
  -20
  -21
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -28
  -29
  -30
  -32
  -33
  -35
  -36
  -38
  -40
  -42
  -44
  -46
  -48
  -50
  -53
  -55
  -58
  -61
  -64
  -67
  -70
New CAPEX, $m
  -22
  -3
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -12
  -12
  -13
  -13
  -14
  -15
  -16
  -16
  -17
Cash from investing activities, $m
  -22
  -23
  -25
  -25
  -26
  -27
  -29
  -30
  -31
  -33
  -34
  -35
  -37
  -39
  -41
  -43
  -44
  -47
  -49
  -52
  -54
  -57
  -60
  -62
  -66
  -68
  -72
  -76
  -80
  -83
  -87
Free cash flow, $m
  123
  77
  79
  82
  84
  87
  90
  94
  97
  101
  105
  109
  114
  119
  124
  129
  135
  141
  147
  154
  161
  169
  176
  185
  193
  203
  212
  222
  233
  244
  256
Issuance/(repayment) of debt, $m
  -30
  6
  6
  6
  7
  7
  8
  8
  9
  9
  10
  11
  11
  12
  12
  13
  14
  15
  15
  16
  17
  18
  19
  20
  21
  22
  23
  24
  26
  27
  28
Issuance/(repurchase) of shares, $m
  -7
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -33
  6
  6
  6
  7
  7
  8
  8
  9
  9
  10
  11
  11
  12
  12
  13
  14
  15
  15
  16
  17
  18
  19
  20
  21
  22
  23
  24
  26
  27
  28
Total cash flow (excl. dividends), $m
  80
  83
  85
  88
  91
  94
  98
  102
  106
  110
  115
  120
  125
  130
  136
  142
  149
  156
  163
  170
  178
  187
  195
  205
  214
  225
  235
  247
  259
  271
  284
Retained Cash Flow (-), $m
  -71
  -8
  -9
  -10
  -10
  -11
  -12
  -13
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -25
  -26
  -27
  -29
  -30
  -32
  -33
  -35
  -37
  -39
  -41
  -43
Prev. year cash balance distribution, $m
 
  294
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  369
  76
  78
  81
  83
  86
  89
  93
  96
  100
  104
  108
  113
  117
  122
  128
  133
  139
  146
  152
  159
  167
  175
  183
  191
  200
  210
  220
  230
  242
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  354
  70
  68
  67
  65
  63
  60
  58
  55
  52
  49
  46
  43
  39
  36
  32
  29
  26
  22
  19
  16
  14
  11
  9
  7
  6
  5
  3
  3
  2
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Methode Electronics, Inc. (Methode) is a manufacturer of component and subsystem devices. The Company designs, manufactures and markets devices employing electrical, radio remote control, electronic, wireless and sensing technologies. The Company operates through segments, including Automotive, Interface, Power Products and Other. The Automotive segment supplies electronic and electro-mechanical devices and related products to automobile original equipment manufacturers (OEMs). The Interface segment provides a range of copper and fiber-optic interface and interface solutions. The Power Products segment manufactures braided flexible cables, current-carrying laminated bus devices, custom power-product assemblies, such as PowerRail solution, high-current low voltage flexible power cabling systems and powder coated bus bars. The Other segment includes medical devices, inverters and battery systems, and insulated gate bipolar transistor solutions.

FINANCIAL RATIOS  of  Methode Electronics (MEI)

Valuation Ratios
P/E Ratio 17.9
Price to Sales 2
Price to Book 3.1
Price to Tangible Book
Price to Cash Flow 11.5
Price to Free Cash Flow 13.5
Growth Rates
Sales Growth Rate 1%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -4.3%
Cap. Spend. - 3 Yr. Gr. Rate -5.4%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 5%
Total Debt to Equity 5%
Interest Coverage 0
Management Effectiveness
Return On Assets 13.7%
Ret/ On Assets - 3 Yr. Avg. 14.7%
Return On Total Capital 17%
Ret/ On T. Cap. - 3 Yr. Avg. 18.8%
Return On Equity 18.4%
Return On Equity - 3 Yr. Avg. 20.1%
Asset Turnover 1.2
Profitability Ratios
Gross Margin 26.7%
Gross Margin - 3 Yr. Avg. 26%
EBITDA Margin 17.1%
EBITDA Margin - 3 Yr. Avg. 16.8%
Operating Margin 13.6%
Oper. Margin - 3 Yr. Avg. 13.6%
Pre-Tax Margin 14.2%
Pre-Tax Margin - 3 Yr. Avg. 13.9%
Net Profit Margin 11.4%
Net Profit Margin - 3 Yr. Avg. 11.1%
Effective Tax Rate 19.8%
Eff/ Tax Rate - 3 Yr. Avg. 19.9%
Payout Ratio 15.1%

MEI stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the MEI stock intrinsic value calculation we used $817 million for the last fiscal year's total revenue generated by Methode Electronics. The default revenue input number comes from 2017 income statement of Methode Electronics. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our MEI stock valuation model: a) initial revenue growth rate of 3.3% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for MEI is calculated based on our internal credit rating of Methode Electronics, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Methode Electronics.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of MEI stock the variable cost ratio is equal to 86.4%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for MEI stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Methode Electronics.

Corporate tax rate of 27% is the nominal tax rate for Methode Electronics. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the MEI stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for MEI are equal to 12.2%.

Life of production assets of 4.3 years is the average useful life of capital assets used in Methode Electronics operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for MEI is equal to 13.7%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $541 million for Methode Electronics - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 36.97 million for Methode Electronics is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Methode Electronics at the current share price and the inputted number of shares is $1.7 billion.

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COMPANY NEWS

▶ Methode Acquires Pacific Insight   [07:00AM  Marketwired]
▶ Methode Electronics' Board Approves Dividend   [Sep-14-17 04:30PM  Marketwired]
▶ Methode tops 1Q revenue forecasts   [Aug-31-17 09:29PM  Associated Press]
▶ Methode Agrees to Acquire Pacific Insight   [05:27PM  Marketwired]
▶ Methode beats Street 4Q forecasts   [Jun-22-17 08:51PM  Associated Press]
▶ Methode Electronics' Board Approves Dividend   [Jun-15-17 04:05PM  Marketwired]
▶ Methode Electronics' Board Approves Dividend   [Mar-16-17 04:30PM  Marketwired]
▶ Methode beats Street 3Q forecasts   [06:39AM  Associated Press]
▶ Methode Electronics' Board Approves Dividend   [Dec-15-16 06:17PM  Marketwired]
▶ Methode Electronics' Board Approves Dividend   [Sep-19-16 04:30PM  Marketwired]
Financial statements of MEI
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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