Yahoo Finance Methode Electronics Stock Appears To Be Significantly Overvalued
- By GF Value
The stock of Methode Electronics (NYSE:MEI, 30-year Financials) shows every sign of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $44.69 per share and the market cap of $1.7 billion, Methode Electronics stock is believed to be significantly overvalued. GF Value for Methode Electronics is shown in the chart below.
Because Methode Electronics is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 7.5% over the past five years.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Methode Electronics has a cash-to-debt ratio of 0.81, which is in the middle range of the companies in Hardware industry. GuruFocus ranks the overall financial strength of Methode Electronics at 7 out of 10, which indicates that the financial strength of Methode Electronics is fair. This is the debt and cash of Methode Electronics over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Methode Electronics has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $997.6 million and earnings of $3.17 a share. Its operating margin of 13.08% better than 83% of the companies in Hardware industry. Overall, GuruFocus ranks Methode Electronics's profitability as strong. This is the revenue and net income of Methode Electronics over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Methode Electronics's 3-year average revenue growth rate is better than 69% of the companies in Hardware industry. Methode Electronics's 3-year average EBITDA growth rate is 14.9%, which ranks in the middle range of the companies in Hardware industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Methode Electronics's ROIC was 10.64, while its WACC came in at 8.25. The historical ROIC vs WACC comparison of Methode Electronics is shown below:
In closing, the stock of Methode Electronics (NYSE:MEI, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Hardware industry. To learn more about Methode Electronics stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
