Methode Electronics: Zacks’ Bull of the Day Play

Methode Electronics (MEISnapshot Report) is the small technology company behind a big portfolio of components, products, and custom-engineered solutions that show up in aerospace, appliance, automotive, communications, industrial, and rail transport systems.

This $1.75 billion global manufacturer of electrical, radio remote control, electronic, wireless, and sensing-based technologies has even developed communication and radar subsystems for the Lockheed Martin (LMTAnalyst Report) F-35 Joint-Strike Fighter and numerous missile-guidance systems.

Methode’s engineering and innovation expertise has developed over 60 years, allowing the company to now serve fifteen of the Fortune Global 100, including Boeing (BAAnalyst Report) and General Motors, and fifty-two of Global 500 companies.

From magnetic signature sensing of mechanical and electrical properties to biometric identification and the revolutionary solid-state touch sensitive switches used in today’s appliances and automobiles, Methode’s extensive toolbox of technical solutions help their customers differentiate their products.

Here’s a snapshot from the company website communicating the growth frontier of touch controls in cars…

Another EPS Surprise

In their recent Q3 FY15 earnings report, Methode beat Street expectations by over 40% on the bottom line with $0.68 EPS and posted a 8.5% year-over-year increase on the top line, even with one less week in the quarter vs Q3 of FY14. This marked the 3rd consecutive EPS surprise, pushing the average beat over 20%.

In addition to strength from the Automotive segment, the company saw revenues for Power Products jump 45%, one of its best quarters ever.

Management raised EPS guidance from $2.25 to $2.55 for FY15 ending in April, implying a 10-cent bump to Q4 projections after the 20-cent Q3 beat. And with no corresponding guidance from the company, analysts raised EPS estimates for FY2016 starting in May to $2.75 from $2.51.

The Margins Story

In Q2 FY15, MEI shares fell sharply from multi-year highs above $42 after an earnings beat but soft guidance and because margin growth was perceived to be slowing, even though Q2 margins jumped from 21.7% to 26.2%, a 20.7% improvement quarter over quarter.

In Methode’s Q3 report earlier this month, margins increased from 20.3% to 27.3%, a 34% improvement quarter over quarter. The latest report turned that view on its head with more margin expansion due to strong sales to automotive markets. Shares leaped above the $42 level on March 5 and haven’t looked back.

The Connected Car is Happening

The alliance between Apple (AAPLAnalyst Report) and Harman International Industries (HARAnalyst Report) in creating infotainment in the “connected car” is just one example of various technology stakeholders investing in and partnering for the future of the automobile.

As manufacturers, suppliers, and software vendors work together to achieve embedded connectivity, Methode will be providing more of the advanced controls, switches, and human interface solutions.

One remarkable innovation that Methode is offering to automotive customers is gesture control. Here’s the company description of technology answering an important need…

“Anytime you move your eyes away from the road risk is added to the drive. To minimize this, Methode has designed a gesture based control method for commonly used functions and allows you to never remove your eyes from the road.”

After their latest earnings report, analysts from Baird Equity Research raised their EPS estimates and target price for MEI shares to $52. Given fundamental momentum for both Methode and global manufacturing, I think MEI shares could easily surpass that target this year.

Disclosure: I own MEI and AAPL shares for the Zacks FTM Portfolio.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money Trader.

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