Intrinsic value of Methode Electronics - MEI

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$39.75

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$39.75

 
Intrinsic value

$36.28

 
Up/down potential

-9%

 
Rating

hold

 
Value-price divergence* premium content

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*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 2016), $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 1.5

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   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

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -8.17
  5.90
  5.81
  5.73
  5.66
  5.59
  5.53
  5.48
  5.43
  5.39
  5.35
  5.31
  5.28
  5.25
  5.23
  5.21
  5.19
  5.17
  5.15
  5.14
  5.12
  5.11
  5.10
  5.09
  5.08
  5.07
  5.06
  5.06
  5.05
  5.05
  5.04
Revenue, $m
  809
  857
  907
  958
  1,013
  1,069
  1,128
  1,190
  1,255
  1,322
  1,393
  1,467
  1,545
  1,626
  1,711
  1,800
  1,893
  1,991
  2,094
  2,201
  2,314
  2,432
  2,556
  2,686
  2,823
  2,966
  3,116
  3,274
  3,439
  3,613
  3,795
Variable operating expenses, $m
 
  738
  781
  826
  873
  922
  973
  1,026
  1,082
  1,140
  1,201
  1,264
  1,331
  1,401
  1,474
  1,551
  1,632
  1,716
  1,804
  1,897
  1,994
  2,096
  2,203
  2,315
  2,432
  2,556
  2,685
  2,821
  2,964
  3,113
  3,270
Fixed operating expenses, $m
 
  2
  2
  2
  2
  2
  2
  2
  2
  2
  3
  3
  3
  3
  3
  3
  3
  3
  3
  3
  3
  3
  3
  4
  4
  4
  4
  4
  4
  4
  4
Total operating expenses, $m
  699
  740
  783
  828
  875
  924
  975
  1,028
  1,084
  1,142
  1,204
  1,267
  1,334
  1,404
  1,477
  1,554
  1,635
  1,719
  1,807
  1,900
  1,997
  2,099
  2,206
  2,319
  2,436
  2,560
  2,689
  2,825
  2,968
  3,117
  3,274
Operating income, $m
  110
  116
  123
  130
  138
  145
  153
  162
  171
  180
  190
  200
  211
  222
  234
  246
  259
  272
  286
  301
  317
  333
  350
  368
  387
  406
  427
  449
  471
  495
  520
EBITDA, $m
  134
  138
  146
  155
  164
  173
  182
  192
  203
  214
  225
  237
  250
  263
  277
  292
  307
  323
  340
  357
  375
  395
  415
  436
  458
  482
  506
  532
  559
  587
  617
Interest expense (income), $m
  0
  2
  2
  3
  3
  4
  4
  5
  5
  6
  6
  7
  7
  8
  9
  9
  10
  11
  12
  12
  13
  14
  15
  16
  17
  18
  19
  21
  22
  23
  25
Earnings before tax, $m
  111
  114
  121
  127
  134
  142
  149
  157
  166
  175
  184
  194
  204
  214
  225
  237
  249
  261
  275
  289
  303
  319
  335
  352
  369
  388
  408
  428
  450
  472
  496
Tax expense, $m
  26
  31
  33
  34
  36
  38
  40
  42
  45
  47
  50
  52
  55
  58
  61
  64
  67
  71
  74
  78
  82
  86
  90
  95
  100
  105
  110
  116
  121
  127
  134
Net income, $m
  85
  83
  88
  93
  98
  103
  109
  115
  121
  127
  134
  141
  149
  156
  164
  173
  182
  191
  201
  211
  221
  233
  244
  257
  270
  283
  298
  313
  328
  345
  362

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  228
  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
  656
  453
  480
  507
  536
  566
  597
  630
  664
  700
  737
  776
  817
  860
  905
  952
  1,002
  1,054
  1,108
  1,165
  1,224
  1,287
  1,352
  1,421
  1,493
  1,569
  1,649
  1,732
  1,820
  1,911
  2,008
Adjusted assets (=assets-cash), $m
  428
  453
  480
  507
  536
  566
  597
  630
  664
  700
  737
  776
  817
  860
  905
  952
  1,002
  1,054
  1,108
  1,165
  1,224
  1,287
  1,352
  1,421
  1,493
  1,569
  1,649
  1,732
  1,820
  1,911
  2,008
Revenue / Adjusted assets
  1.890
  1.892
  1.890
  1.890
  1.890
  1.889
  1.889
  1.889
  1.890
  1.889
  1.890
  1.890
  1.891
  1.891
  1.891
  1.891
  1.889
  1.889
  1.890
  1.889
  1.891
  1.890
  1.891
  1.890
  1.891
  1.890
  1.890
  1.890
  1.890
  1.891
  1.890
Average production assets, $m
  103
  109
  115
  122
  129
  136
  143
  151
  159
  168
  177
  186
  196
  206
  217
  229
  240
  253
  266
  280
  294
  309
  325
  341
  358
  377
  396
  416
  437
  459
  482
Working capital, $m
  378
  158
  168
  177
  187
  198
  209
  220
  232
  245
  258
  271
  286
  301
  317
  333
  350
  368
  387
  407
  428
  450
  473
  497
  522
  549
  576
  606
  636
  668
  702
Total debt, $m
  57
  68
  80
  92
  104
  117
  131
  145
  160
  175
  192
  209
  227
  245
  265
  285
  307
  329
  353
  378
  404
  431
  459
  489
  521
  554
  588
  624
  663
  702
  744
Total liabilities, $m
  186
  197
  209
  221
  233
  246
  260
  274
  289
  304
  321
  338
  356
  374
  394
  414
  436
  458
  482
  507
  533
  560
  588
  618
  650
  683
  717
  753
  792
  831
  873
Total equity, $m
  470
  256
  271
  287
  303
  320
  337
  356
  375
  395
  416
  439
  462
  486
  511
  538
  566
  595
  626
  658
  692
  727
  764
  803
  844
  887
  932
  979
  1,028
  1,080
  1,134
Total liabilities and equity, $m
  656
  453
  480
  508
  536
  566
  597
  630
  664
  699
  737
  777
  818
  860
  905
  952
  1,002
  1,053
  1,108
  1,165
  1,225
  1,287
  1,352
  1,421
  1,494
  1,570
  1,649
  1,732
  1,820
  1,911
  2,007
Debt-to-equity ratio
  0.121
  0.270
  0.290
  0.320
  0.340
  0.370
  0.390
  0.410
  0.430
  0.440
  0.460
  0.480
  0.490
  0.500
  0.520
  0.530
  0.540
  0.550
  0.560
  0.570
  0.580
  0.590
  0.600
  0.610
  0.620
  0.620
  0.630
  0.640
  0.640
  0.650
  0.660
Adjusted equity ratio
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565
  0.565

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  85
  83
  88
  93
  98
  103
  109
  115
  121
  127
  134
  141
  149
  156
  164
  173
  182
  191
  201
  211
  221
  233
  244
  257
  270
  283
  298
  313
  328
  345
  362
Depreciation, amort., depletion, $m
  24
  22
  23
  25
  26
  27
  29
  30
  32
  34
  36
  37
  39
  41
  43
  46
  48
  51
  53
  56
  59
  62
  65
  68
  72
  75
  79
  83
  87
  92
  96
Funds from operations, $m
  98
  105
  111
  118
  124
  131
  138
  145
  153
  161
  170
  179
  188
  198
  208
  218
  230
  241
  254
  267
  280
  294
  309
  325
  341
  359
  377
  396
  416
  436
  458
Change in working capital, $m
  -13
  9
  9
  10
  10
  10
  11
  11
  12
  13
  13
  14
  14
  15
  16
  16
  17
  18
  19
  20
  21
  22
  23
  24
  25
  26
  28
  29
  31
  32
  34
Cash from operations, $m
  111
  95
  102
  108
  114
  120
  127
  134
  141
  149
  157
  165
  173
  183
  192
  202
  212
  223
  235
  247
  259
  273
  286
  301
  316
  332
  349
  367
  385
  404
  425
Maintenance CAPEX, $m
  0
  -21
  -22
  -23
  -24
  -26
  -27
  -29
  -30
  -32
  -34
  -35
  -37
  -39
  -41
  -43
  -46
  -48
  -51
  -53
  -56
  -59
  -62
  -65
  -68
  -72
  -75
  -79
  -83
  -87
  -92
New CAPEX, $m
  -23
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -12
  -13
  -14
  -14
  -15
  -16
  -17
  -17
  -18
  -19
  -20
  -21
  -22
  -23
Cash from investing activities, $m
  -22
  -27
  -28
  -30
  -31
  -33
  -35
  -37
  -38
  -41
  -43
  -44
  -47
  -49
  -52
  -54
  -58
  -60
  -64
  -67
  -70
  -74
  -78
  -82
  -85
  -90
  -94
  -99
  -104
  -109
  -115
Free cash flow, $m
  89
  69
  74
  78
  83
  87
  92
  97
  103
  108
  114
  120
  126
  133
  140
  147
  155
  163
  171
  180
  189
  199
  209
  220
  231
  242
  255
  267
  281
  295
  310
Issuance/(repayment) of debt, $m
  52
  11
  11
  12
  12
  13
  14
  14
  15
  16
  16
  17
  18
  19
  20
  20
  21
  23
  24
  25
  26
  27
  29
  30
  31
  33
  35
  36
  38
  40
  42
Issuance/(repurchase) of shares, $m
  -62
  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  
  -15
  11
  11
  12
  12
  13
  14
  14
  15
  16
  16
  17
  18
  19
  20
  20
  21
  23
  24
  25
  26
  27
  29
  30
  31
  33
  35
  36
  38
  40
  42
Total cash flow (excl. dividends), $m
  74
  80
  85
  90
  95
  100
  106
  112
  118
  124
  130
  137
  144
  152
  160
  168
  176
  185
  195
  205
  215
  226
  237
  249
  262
  275
  289
  304
  319
  335
  352
Retained Cash Flow (-), $m
  -11
  -14
  -15
  -16
  -16
  -17
  -18
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -27
  -28
  -29
  -31
  -32
  -34
  -35
  -37
  -39
  -41
  -43
  -45
  -47
  -49
  -52
  -54
Prev. year cash balance distribution, $m
 
  228
  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
 
  294
  71
  75
  79
  84
  88
  93
  98
  104
  109
  115
  121
  127
  134
  141
  148
  156
  164
  173
  181
  191
  200
  211
  221
  232
  244
  256
  269
  283
  297
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
 
  282
  65
  65
  65
  65
  64
  63
  61
  60
  57
  55
  52
  48
  45
  41
  38
  34
  30
  27
  23
  20
  17
  14
  11
  9
  7
  6
  4
  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. designs, manufactures, and markets component and subsystem devices in the United States and internationally. The company operates through Automotive, Interface, Power Products, and Other segments. The Automotive segment offers electronic and electro-mechanical devices, and related products to automobile original equipment manufacturers directly or through their tiered suppliers. Its products include integrated center consoles, hidden switches, ergonomic switches, transmission lead frames, and sensors, which incorporate magneto-elastic sensing and other technologies that monitor the operation or status of a component or system. The Interface segment provides various copper and fiber-optic interface and interface solutions for the aerospace, appliance, commercial food service, computer, construction, consumer, material handling, medical, military, mining, networking, point-of-sale, storage, and telecommunications markets. Its solutions consist of conductive polymers, connectors, custom cable assemblies, industrial safety radio remote controls, optical and copper transceivers, and solid-state field effect consumer touch panels; and services include the design and installation of fiber optic and copper infrastructure systems, and manufacturing active and passive optical components. The Power Products segment manufactures braided flexible cables, current-carrying laminated bus bars and devices, custom power-product assemblies, high-current low voltage flexible power cabling systems, and powder coated bus bars that are used in various markets and applications, including aerospace, computers, industrial and power conversion, military, telecommunications, and transportation. The Other segment offers medical devices, inverters and battery systems, and insulated gate bipolar transistor solutions. Methode Electronics, Inc. was founded in 1946 and is headquartered in Chicago, Illinois.

FINANCIAL RATIOS  of  Methode Electronics (MEI)

Valuation Ratios
P/E Ratio 17.2
Price to Sales 1.8
Price to Book 3.1
Price to Tangible Book
Price to Cash Flow 13.2
Price to Free Cash Flow 16.6
Growth Rates
Sales Growth Rate -8.2%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 0%
Cap. Spend. - 3 Yr. Gr. Rate -10%
Financial Strength
Quick Ratio NaN
Current Ratio 0.1
LT Debt to Equity 12.1%
Total Debt to Equity 12.1%
Interest Coverage 0
Management Effectiveness
Return On Assets 13.5%
Ret/ On Assets - 3 Yr. Avg. 16.5%
Return On Total Capital 17.2%
Ret/ On T. Cap. - 3 Yr. Avg. 21.4%
Return On Equity 18.3%
Return On Equity - 3 Yr. Avg. 23.4%
Asset Turnover 1.3
Profitability Ratios
Gross Margin 26.3%
Gross Margin - 3 Yr. Avg. 23.8%
EBITDA Margin 16.7%
EBITDA Margin - 3 Yr. Avg. 15.4%
Operating Margin 13.6%
Oper. Margin - 3 Yr. Avg. 12.3%
Pre-Tax Margin 13.7%
Pre-Tax Margin - 3 Yr. Avg. 12.4%
Net Profit Margin 10.5%
Net Profit Margin - 3 Yr. Avg. 11.5%
Effective Tax Rate 23.4%
Eff/ Tax Rate - 3 Yr. Avg. 4.5%
Payout Ratio 16.5%

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 $809 million for the last fiscal year's total revenue generated by Methode Electronics. The default revenue input number comes from 2016 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 5.9% 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 86.2%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $2 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 12.7%.

Life of production assets of 4.4 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 18.5%. 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 - $470 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 36.842 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 $1.5 billion.


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COMPANY NEWS

▶ 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]
▶ Methode Electronics, Inc. Announces CFO Transition   [Jul-21-16 05:47PM  Marketwired]
▶ Methode Electronics' Board Approves Dividend   [Jun-16-16 04:30PM  Marketwired]
▶ Video-Investor Presentation April 2016 for Methode Electronics, Inc.   [Apr-08-16 12:39PM  at Company Spotlight]
▶ Methode Electronics' Board Approves Dividend   [Mar-18-16 08:49PM  at noodls]
Stock chart of MEI Financial statements of MEI Annual reports 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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