Intrinsic value of Methode Electronics - MEI

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$40.95

  Intrinsic Value

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  Value-price divergence*

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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
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  809
  825
  844
  866
  890
  917
  947
  979
  1,014
  1,052
  1,092
  1,135
  1,181
  1,230
  1,282
  1,338
  1,396
  1,458
  1,524
  1,593
  1,666
  1,744
  1,825
  1,911
  2,002
  2,097
  2,197
  2,303
  2,414
  2,531
  2,654
Variable operating expenses, $m
 
  711
  728
  746
  767
  791
  816
  844
  874
  906
  941
  978
  1,018
  1,060
  1,105
  1,153
  1,203
  1,257
  1,313
  1,373
  1,436
  1,503
  1,573
  1,647
  1,725
  1,807
  1,893
  1,984
  2,080
  2,181
  2,287
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
  713
  730
  748
  769
  793
  818
  846
  876
  908
  944
  981
  1,021
  1,063
  1,108
  1,156
  1,206
  1,260
  1,316
  1,376
  1,439
  1,506
  1,576
  1,651
  1,729
  1,811
  1,897
  1,988
  2,084
  2,185
  2,291
Operating income, $m
  110
  112
  114
  117
  121
  124
  128
  133
  138
  143
  148
  154
  161
  167
  174
  182
  190
  199
  208
  217
  227
  238
  249
  261
  273
  286
  300
  314
  330
  346
  363
EBITDA, $m
  134
  133
  136
  140
  143
  148
  153
  158
  163
  170
  176
  183
  191
  199
  207
  216
  226
  236
  246
  258
  269
  282
  295
  309
  324
  339
  356
  373
  391
  410
  430
Interest expense (income), $m
  0
  2
  2
  2
  2
  3
  3
  3
  3
  4
  4
  4
  5
  5
  5
  6
  6
  7
  7
  8
  8
  9
  10
  10
  11
  12
  12
  13
  14
  15
  16
Earnings before tax, $m
  111
  110
  112
  115
  118
  122
  126
  130
  134
  139
  144
  150
  156
  162
  169
  176
  184
  192
  200
  209
  219
  229
  239
  250
  262
  275
  288
  301
  316
  331
  347
Tax expense, $m
  26
  30
  30
  31
  32
  33
  34
  35
  36
  38
  39
  41
  42
  44
  46
  48
  50
  52
  54
  57
  59
  62
  65
  68
  71
  74
  78
  81
  85
  89
  94
Net income, $m
  85
  80
  82
  84
  86
  89
  92
  95
  98
  101
  105
  110
  114
  118
  123
  129
  134
  140
  146
  153
  160
  167
  175
  183
  191
  200
  210
  220
  230
  242
  253

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
  437
  447
  458
  471
  485
  501
  518
  536
  556
  578
  601
  625
  651
  678
  708
  739
  772
  806
  843
  882
  923
  966
  1,011
  1,059
  1,109
  1,163
  1,218
  1,277
  1,339
  1,404
Adjusted assets (=assets-cash), $m
  428
  437
  447
  458
  471
  485
  501
  518
  536
  556
  578
  601
  625
  651
  678
  708
  739
  772
  806
  843
  882
  923
  966
  1,011
  1,059
  1,109
  1,163
  1,218
  1,277
  1,339
  1,404
Revenue / Adjusted assets
  1.890
  1.888
  1.888
  1.891
  1.890
  1.891
  1.890
  1.890
  1.892
  1.892
  1.889
  1.889
  1.890
  1.889
  1.891
  1.890
  1.889
  1.889
  1.891
  1.890
  1.889
  1.889
  1.889
  1.890
  1.890
  1.891
  1.889
  1.891
  1.890
  1.890
  1.890
Average production assets, $m
  103
  105
  107
  110
  113
  116
  120
  124
  129
  134
  139
  144
  150
  156
  163
  170
  177
  185
  194
  202
  212
  221
  232
  243
  254
  266
  279
  292
  307
  321
  337
Working capital, $m
  378
  153
  156
  160
  165
  170
  175
  181
  188
  195
  202
  210
  219
  228
  237
  247
  258
  270
  282
  295
  308
  323
  338
  354
  370
  388
  406
  426
  447
  468
  491
Total debt, $m
  57
  61
  65
  70
  76
  82
  89
  96
  104
  113
  122
  132
  143
  154
  166
  179
  192
  207
  222
  238
  255
  272
  291
  311
  332
  354
  377
  401
  427
  453
  482
Total liabilities, $m
  186
  190
  194
  199
  205
  211
  218
  225
  233
  242
  251
  261
  272
  283
  295
  308
  321
  336
  351
  367
  384
  401
  420
  440
  461
  483
  506
  530
  556
  582
  611
Total equity, $m
  470
  247
  252
  259
  266
  274
  283
  293
  303
  314
  326
  339
  353
  368
  383
  400
  417
  436
  456
  476
  498
  521
  546
  571
  598
  627
  657
  688
  722
  757
  793
Total liabilities and equity, $m
  656
  437
  446
  458
  471
  485
  501
  518
  536
  556
  577
  600
  625
  651
  678
  708
  738
  772
  807
  843
  882
  922
  966
  1,011
  1,059
  1,110
  1,163
  1,218
  1,278
  1,339
  1,404
Debt-to-equity ratio
  0.121
  0.250
  0.260
  0.270
  0.290
  0.300
  0.310
  0.330
  0.340
  0.360
  0.370
  0.390
  0.400
  0.420
  0.430
  0.450
  0.460
  0.470
  0.490
  0.500
  0.510
  0.520
  0.530
  0.540
  0.550
  0.560
  0.570
  0.580
  0.590
  0.600
  0.610
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
  80
  82
  84
  86
  89
  92
  95
  98
  101
  105
  110
  114
  118
  123
  129
  134
  140
  146
  153
  160
  167
  175
  183
  191
  200
  210
  220
  230
  242
  253
Depreciation, amort., depletion, $m
  24
  21
  22
  22
  23
  23
  24
  25
  26
  27
  28
  29
  30
  31
  33
  34
  35
  37
  39
  40
  42
  44
  46
  49
  51
  53
  56
  58
  61
  64
  67
Funds from operations, $m
  98
  101
  104
  106
  109
  112
  116
  120
  124
  128
  133
  138
  144
  150
  156
  163
  170
  177
  185
  193
  202
  211
  221
  231
  242
  254
  266
  278
  292
  306
  321
Change in working capital, $m
  -13
  3
  4
  4
  5
  5
  5
  6
  6
  7
  7
  8
  9
  9
  10
  10
  11
  11
  12
  13
  14
  14
  15
  16
  17
  18
  19
  20
  21
  22
  23
Cash from operations, $m
  111
  97
  100
  102
  105
  107
  110
  114
  117
  121
  126
  130
  135
  141
  146
  152
  159
  166
  173
  180
  189
  197
  206
  216
  226
  236
  247
  259
  271
  284
  298
Maintenance CAPEX, $m
  0
  -21
  -21
  -21
  -22
  -23
  -23
  -24
  -25
  -26
  -27
  -28
  -29
  -30
  -31
  -33
  -34
  -35
  -37
  -39
  -40
  -42
  -44
  -46
  -49
  -51
  -53
  -56
  -58
  -61
  -64
New CAPEX, $m
  -23
  -2
  -2
  -3
  -3
  -3
  -4
  -4
  -4
  -5
  -5
  -5
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -13
  -13
  -14
  -15
  -16
Cash from investing activities, $m
  -22
  -23
  -23
  -24
  -25
  -26
  -27
  -28
  -29
  -31
  -32
  -33
  -35
  -36
  -38
  -40
  -41
  -43
  -45
  -48
  -49
  -52
  -54
  -57
  -60
  -63
  -66
  -69
  -72
  -76
  -80
Free cash flow, $m
  89
  75
  77
  78
  80
  81
  83
  86
  88
  91
  94
  97
  101
  104
  108
  113
  117
  122
  127
  133
  139
  145
  151
  158
  165
  173
  181
  190
  199
  208
  218
Issuance/(repayment) of debt, $m
  52
  4
  4
  5
  6
  6
  7
  7
  8
  9
  9
  10
  11
  11
  12
  13
  13
  14
  15
  16
  17
  18
  19
  20
  21
  22
  23
  24
  26
  27
  28
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
  4
  4
  5
  6
  6
  7
  7
  8
  9
  9
  10
  11
  11
  12
  13
  13
  14
  15
  16
  17
  18
  19
  20
  21
  22
  23
  24
  26
  27
  28
Total cash flow (excl. dividends), $m
  74
  79
  81
  83
  85
  88
  90
  93
  96
  100
  103
  107
  111
  116
  120
  126
  131
  137
  143
  149
  156
  163
  170
  178
  186
  195
  204
  214
  224
  235
  246
Retained Cash Flow (-), $m
  -11
  -5
  -6
  -6
  -7
  -8
  -9
  -10
  -10
  -11
  -12
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -26
  -27
  -28
  -30
  -32
  -33
  -35
  -37
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
 
  302
  75
  76
  78
  79
  81
  83
  86
  88
  91
  94
  97
  101
  105
  109
  113
  118
  123
  128
  134
  140
  146
  152
  159
  167
  174
  182
  191
  200
  209
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
 
  290
  69
  67
  64
  62
  59
  56
  54
  51
  48
  45
  42
  38
  35
  32
  29
  26
  23
  20
  17
  14
  12
  10
  8
  6
  5
  4
  3
  2
  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 17.7
Price to Sales 1.9
Price to Book 3.2
Price to Tangible Book
Price to Cash Flow 13.6
Price to Free Cash Flow 17.1
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 2% 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 35.986 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 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]
▶ 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]
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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