University of Illinois at Urbana-Champaign

Applied Portfolio Management

Methode ElectronicsCindy Anggraini Lu Han Rahul Gohil Vanditha R Zhi Cheng (Nicole) Low

December 1, 2015

ANALYSTS

Cindy Anggrainianggrai2@illinois.edu

Lu Hanluhan4@illinois.edu

Rahul Gohilgohil3@illinois.edu

Vanditha R. Mmysorer2@illinois.edu

Zhi Cheng (Nicole) Lowzlow4@illinois.edu

Holding100 shares on Apr 13,

2015

Purchase Price = $46.61

Current Price =

$36.08 at Nov 30,

2015

Return = -22.59%

Source: Yahoo Finance

AGENDA

Company Overview Macro-economic Overview

Financial AnalysisTechnical Analysis

Projection & ValuationRecommendation

Company Overview

Macro-economic Overview

Financial Analysis

Technical Analysis

Projection &

Valuation

Recommendation

Company Overview: Introduction

Automotive

Interface

Power Products

Other

Business Description

Manufacturer of component and subsystem devices

Year Founded 1946

Market Cap $1.4 billion

TTM P/E 13.78

Primary Industry Electronic Manufacturing Services

Source: Yahoo Finance

Company Overview: Operating Coverage

USA Europe Asia

The company is operating globally, with mostly in USA, Europe, and Asia The biggest facilities are in Mexico and Malta

Company Overview: Revenue Breakdown (2015)

Product Geographic

Source: Investor Presentation

Company Overview: Automotive Segment

Integrated Center Console

• Ford• General Motors• Renault• Fiat• Aston Martin

Transmission Solutions

• General Motors• Ford• VW

Torque Sensor

• BMW

Hidden & Ergonomic Switches

• Global Market Share of 18%

• European Union Market Share of 35%

Source: Investor Presentation

Company Overview: Interface Segment

Consumer Touch Panels

• High resolution LCD touchscreens

• Over 30% of commercial/industrial solid state touch interfaces in North America

Industrial User Interfaces

• Radio Remote Control Solutions

Data Center Infrastructure

Solutions• Fiber Optic &

copper cable assemblies

• Uninterruptable Power Supply

Main Clients

• Coca Cola, John Deere, Whirlpool, Kitchen Aid, Maytag, Hitachi

Source: Investor Presentation

Company Overview: Power Products Segment• Braided flexible cables• EV bus bar assemblies• Nissan Leaf

• North America & Europe• Each vehicle requires 48 battery modules• Three Methode assemblies utilized on each battery module

• Tesla S

• PowerRail• Power distribution system• Currently shipping to “Big Data” customer

Source: Investor Presentation

Company Overview: Future Projects

SmartCenter StackWireless cell phone connection, Vehicle touchscreens

HighPerTouchEnhanced touch performance

10G Copper Transceiver ModulesMore cost effective than optical counterparts

Dabir SurfacesNew technology for pressure ulcer prevention

1

2

3

4Source: Investor Presentation

Company Overview: SWOTSt

reng

ths • Distribution

and sales network

• Tax advantages due to global locations

• Low debt financing

Wea

knes

s • High exposure to automotive sector, esp. Ford and GM

• Lengthy sales cycle

• Price of raw materials

• Highly competitive market environment

• Exchange rate

Opp

ortu

nitie

s • Engagement in M&A activity

• Diversifying product portfolio

Thre

ats • Changes in

technology• Continued

pressure to lower prices

S W O T

Company Overview: Porter 5 Forces

Bargaining Power of Buyers:

High

Bargaining Power of Suppliers:Moderate

Threats of New

Entrants: Low

Threats of Substitutes:

Moderate

Rivalry:Moderate

Porter 5 Forces

Bargaining Power of Buyers – HighContinued pressure to lower prices to avoid competition

Bargaining Power of Suppliers – ModerateAvailability of raw materials from different suppliers

Threat of new entrants – LowHigh initial investments

Threat of substitutes – ModerateCustomized products for each manufacturer

Rivalry among existing competitors – ModerateCompetition on Price and Technological advancements

Company Overview

Macro-economic Overview

Financial Analysis

Technical Analysis

Projection &

Valuation

Recommendation

Macro-economic Overview

Automotive Industry

• US vehicle sales will rise to record peak in 2017

• Tesla S and Nissan leaf among top 5 electric car models

Electronic Industry

• Rapidly-increasing data traffic is driving the demand for data storage

• Global power electronics market growth rate to fall post 2018

Heavy Equipment Industry

• Agriculture equipment demand to fall in US, offset by Asia

• Heavy construction equipment market driven by emerging markets

Source: KPMG’s Global Automotive Executive Survey 2015, Clean Technica, DatacenterDynamics, HIS Technology, PR Newswire, Freedonia Group

Macro-economic Overview

Automotive Outlook Based on Sales Volume Long-term Touch Module Shipment Forecast

Source: IHS, KPMG Global Automotive Survey

• GM & Ford will hold their position by sales volumes in 2020• Touch Panel Module shipments to rise but at lower growth rates

Company Overview

Macro-economic Overview

Financial Analysis

Technical Analysis

Projection &

Valuation

Recommendation

Financial Analysis: Agenda

• Financial Highlights• Liquidity and Leverage Ratio• Profitability and Activity Ratio• Greenblatt and Dupont Ratio

Financial Highlights: Revenue Breakdown (2015)

Automotive Interface Power Products

Source: 10-k 2015

Financial Analysis: Liquidity & Leverage Ratio

Liquidity Ratio Leverage Ratio

Source: 10-k 2015

Financial Analysis: Profitability & Activity Ratio

Profitability Ratio Activity Ratio

Source: 10-k 2015

Financial Analysis: Greenblatt & Dupont Ratio

Greenblatt Ratio

Dupont Analysis

2011 2012 2013 2014 20150.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

10.60%6.94%

18.10%

27.90%

42.42%

4.26% 4.15%

7.83% 7.08% 7.34%

EBIT/Tangible Asset EBIT/EV

2011 2012 2013 2014 2015Tax Burden 134.48% 73.68% 107.39% 126.61% 83.69%Interest Burden 90.63% 100.00% 96.68% 103.13% 107.66%Operating Profit Margin 3.74% 2.45% 7.54% 9.52% 12.73%Asset Turnover 1.26x 1.24x 1.53x 1.49xLeverage 1.44x 1.54x 1.48x 1.39xROE 3.27% 14.95% 28.21% 23.77%

Source: 10-k 2015

Company Overview

Macro-economic Overview

Financial Analysis

Technical Analysis

Projection &

Valuation

Recommendation

Technical Analysis

Methode Electronics

Big drop (around 30%) on June 25, 2015 because company’s financial results were not able to meet the investor expectations.

Source: Yahoo Finance

Company Overview

Macro-economic Overview

Financial Analysis

Technical Analysis

Projection &

Valuation

Recommendation

Projection and Valuation: Agenda

Assumptions

Revenue Projection

Valuation : DCF and Comparable

1

2

3

Projection and Valuation: Assumptions• Management guidance for 2016• Sales - $830-$865mm• Operating Income - $108-$119mm

• Continue to invest in core business and grow• Maintaining strong and flexible balance sheet with

ample liquidity• Targeting 5 year EBITDA CAGR of 9-10%• Auto sales to peak in 2017 and drop after that

Source: Investor Presentation

Projection: Revenue

Revenue Projection Revenue Projection per Segment

Projection: Revenue per Segment

Interface

Power Products

Automotive

Valuation: DCF

1 2 3 4 52016E 2017E 2018E 2019E 2020E

Net Income 99.1 118.4 141.0 165.8 192.0Depreciation 18.1 19.6 21.4 23.5 26.0CapEx 26.0 30.8 36.5 42.7 49.3

Increasein Acc Receivable 13.8 35.8 41.4 40.3 42.8Increase in Inventory 10.8 16.1 18.5 14.3 19.9Increase in Acc Payable 6.7 2.4 3.3 3.9 6.2Net Changes in Working Capital 17.9 49.4 56.6 50.6 56.5Free Cash Flow 73.4 57.8 69.4 96.0 112.3 1,182.0Discounted Cash flows 64.4 44.5 47.0 57.1 58.6 617.2Net Present Value of the firm 888.9Value of Debt 5.0Value of Equity 883.9

Discount Rate 13.9%Long Term Growth Rate 4.0%No of Shares OutStanding (mn) 38.5

DCF Valuation

Assumptions

in $ million (unless stated)

Terminal ValueChanges in net working capital

Share Price USD 23.0

Valuation: Sensitivity Analysis

22.97 3.00% 3.50% 4.00% 4.50% 5.00%12.88% 23.72 24.69 25.77 26.98 28.3413.38% 22.48 23.34 24.30 25.36 26.5413.88% 21.36 22.13 22.97 23.91 24.9514.38% 20.33 21.02 21.78 22.61 23.5314.88% 19.40 20.02 20.69 21.43 22.25

Valuation: Comparable Methodology

Industry: Electronic Manufacturing

Services

Sector: Technology

Similar Product Mix

Similar End Markets

International Exposure

CTSDesigns and manufactures sensors and actuators, and electronic components worldwide.

AmphenolDesigns and manufactures electrical, electronic, and fiber optic connectors worldwide.

AVXDesigns and manufactures electronic passive components and interconnect solutions worldwide.

Valuation: Comparable Valuation Result

LTM EV/Revenue LTM EV/EBITDA LTM P/E LTM P/BV

CTS Corp. (CTS) 1.4x 8.4x 22.8x 2.7x

Amphenol Corp. (APH) 3.3x 14.1x 22.9x 80.5x

AVX Corp. (AVX) 1.1x 5.9x 11.0x 1.2x

Median 1.4x 8.4x 22.8x 2.7x

Implied Price 35.8 37.1 60.6 31.6

Equally weighted average price per share: $41.3

Valuation: Background of Comparison

MEI is a unique company

Most of its revenue comes from automotive

Market treats MEI similar to its customers

1

2

3

Valuation: Comparable Valuation Result (Cont.)

Equally weighted average price per share: $32.2

LTM EV/Revenue LTM EV/EBITDA LTM P/E LTM P/BV

Whirlpool Corp. (WHR) 0.8x 8.7x 19.0x 2.7x

General Motors Company (GM) 0.6x 6.0x 13.3x 1.7x

Ford Motor Co. (F) 1.1x 10.8x 12.0x 2.1x

Deere & Company (DE) 2.1x 13.8x 13.8x 3.8x

Median 1.0x 9.8x 13.6x 2.4x

Implied Price 25.7 42.3 36.0 24.6

Company Overview

Macro-economic Overview

Financial Analysis

Technical Analysis

Projection &

Valuation

Recommendation

Recommendation

SELLComparable Valuation

DCF Valuation

Revenue Projection

Industry Factor

Sell 100 shares @market price

THANK YOU