Update: Methode Electronics Exceeds FQ2 Earnings And Raises EPS Guidance

| About: Methode Electronics, (MEI)
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Methode beat estimates on the top and bottom lines.

This reinforces my positive outlook for the company.

I previously pointed out that Methode was likely to perform well on the strength of auto sales.

Automotive electronics manufacturer, Methode Electronics (NYSE:MEI), performed well during its fiscal second quarter. The company increased revenue by 20% to $229.7 million, beating estimates by over $9 million. EPS increased 29% to $0.66, beating estimates by $0.11 or 20%. Consolidated gross margins increased 450 basis points, driven by higher sales, manufacturing efficiencies, a favorable automotive and power products sales mix, increased volume at the lower cost Egypt manufacturing facility, and a $1.3 million reimbursement for the cancellation of a center program. Methode increased its profit outlook for fiscal 2015 to a range of $114 million to $120 million for income from operations and $2.20 to $2.30 for EPS. The prior EPS estimate for fiscal 2015 was $2.16.

Net sales for the Automotive segment increased 32% in FQ2 due to higher sales for center consoles & lead frames along with non-recurring price adjustments in AMD. Sales for the Power Products segment increased 15% driven by higher Datacom sales in North America and Asia and increased demand for busbars and cable assemblies in Asia. This was offset slightly from lower bypass switch sales in Europe. The Power segment is having its best year in its 30-year history. Sales for the smaller Interface segment declined 8% due to lower North American remote control and appliance sales and lower remote control sales in Asia.

These results reinforce my positive outlook for Methode. I previously pointed out in my in-depth Methode article that the company would perform well on the strength of the auto market. The results from FQ2 show that the company was able to achieve strong double-digit sales gains from strong auto sales. The stock is still undervalued as it trades at only 13.8X next fiscal year's expected EPS of $2.52. This is lower than the forward PE of 15 for the Diversified Electronics industry. Given the low valuation and the company's expected earnings growth of 11.5% for fiscal 2016, I expect the stock to have a strong year. If Methode's PE rises to the industry average of 15, the stock could increase at a rate that is slightly higher than the expected earnings growth rate of 11.5% within the next 12 months.

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