Methode Electronics (NYSE:MEI) Misses Q4 Revenue Expectations: Is Now the Time to Buy?

Methode Electronics, a global supplier of custom-engineered solutions, reported its Q4 earnings, revealing a 7.6% year-on-year decline in sales to $239.9 million. This fell short of analyst estimates, leading to a 15% drop in the company's stock price. The revenue guidance for the next quarter also missed expectations, coming in 15.4% below analyst estimates. With a non-GAAP loss of $0.21 per share, significantly below consensus estimates, investors are left wondering if now is the time to buy Methode Electronics.

The company's operating margin was -0.9%, in line with the same quarter last year, while its free cash flow margin improved to 8.2%, up from 4.7% in the same quarter last year. However, the market capitalization of $341.9 million raises concerns about the company's valuation. President and Chief Executive Officer Jon DeGaynor stated, "Our journey to transform Methode is well underway. Our actions to improve execution, while still in an early phase, positively impacted our financial results but were partially masked by challenging market headwinds." Despite the challenges, the company's gross profit was higher than the prior year, thanks to benefits from transformation actions like lower scrap and premium freight costs.

Examining Methode Electronics' long-term performance reveals a struggle to consistently increase demand. The company's sales have declined by 4.3% annually over the last two years, and its revenue has remained suppressed. While sell-side analysts expect revenue to grow 6.3% over the next 12 months, this projection is still below the sector average. The company's operating margin has decreased by 15.4 percentage points over the last five years, indicating rising costs and an inability to pass them on to customers. With a breakeven margin in line with the same quarter last year, the company's cost structure appears stable, but its EPS has declined by 17.1% annually over the last five years, highlighting the struggle to adjust to choppy demand. As the company navigates the challenges of the electrical systems industry, including cyclical downturns and intense competition, investors must carefully consider the valuation and growth prospects before making a decision.