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Methode Electronics manufactures new image with less emphasis on autos

by Carolyne Yu
Aug 19, 2007


METHODE_headquarters

Carolyne Yu/Medill

Chicago-based Methode Electronics Inc. is in the midst of revamping its image from automotive supplier to technology company.

Methode Electronics Inc. no longer wants to be known as an automotive supplier and is engineering a new image as a technology company. But in the near-term, the Chicago-based electronics and component manufacturer is braced for more declines in the U.S. auto industry.

Analysts are optimistic about Methode’s long-term prospects as the company diversifies its customer base, develops new products and expands globally.

“Their problem is they have concentration of revenue with Chrysler and Ford,” said Kevin Sarsany of Next Generation Equity Research LLC in Chicago.

Four years ago, 85 percent of Methode’s revenues came from its automotive segment, which is powered by U.S. automakers Ford Motor Co., DaimlerChrysler AG and to a lesser extent, General Motors Corp.

Today that number is closer to 70 percent, and the company wants to shrink it further to between 60 and 65 percent.

Lower auto revenue concentration is good news for Methode, especially as Ford and Chrysler lose market share to European and Asian competitors. In just one year, Ford’s U.S. market share dropped 1.1 percentage points to 15.6 percent as of June 30, 2007, from 16.7 percent a year ago.

At the same time, GM’s U.S. market share fell 1.3 percentage points to 22.8 percent from 24.1 percent.

Despite the slide in U.S. autos, Methode almost tripled its fiscal 2007 fourth-quarter earnings. Net income for the quarter ended April 28 rose to $12.1 million, or 33 cents per diluted share, from $4.3 million, or 12 cents per diluted share, a year ago.

But Methode withdrew its financial guidance for the 2008 fiscal first quarter, while forecasting sales for the full fiscal year of  between $455 million and $475 million, and earnings per diluted share of between 65 cents and 75 cents.

Methode has a trailing 12-month price-to-earnings ratio of about 20, higher than the S&P 500’s ratio of 17.  The company's shares have soared 90 percent over the past year, closing Tuesday at $14.50, up 2 cents from Monday's close.

Nearly half of the Methode’s fiscal 2007 earnings came from the fourth quarter, the company said. Sales grew from overseas customers, such as Ford and Porsche in Europe and GM in Asia, helping to offset the negative effects of poor sales to U.S. automakers' domestic operations.

Methode said it has no plans to discontinue its automotive segment, which manufactures devices such as power door switches and fluid level sensors.

But the company plans to broaden and diversify its two other business units --  interconnect and power distribution -- which serve industries ranging from telecommunications to transportation.

Methode's interconnect division, which saw 20 percent growth in the fourth quarter, manufactures pieces in computers and other equipment that enable data transfer. 

The power distribution division, with 40-percent growth in the fourth quarter, supplies products like network bars and power cables that can distribute high voltage energy needed to operate machinery ranging from electric cars to elevators.

“[Expansion] within those industries… will naturally start to have a diluted effect on automotive,” said Joey Iske, Methode’s director of investor relations. “It’s just the balance starts to shift.”

The company is shedding unprofitable parts of the automotive business, which it has been doing over the past several years, she said. At the same time, Methode hopes to replace some of its older legacy businesses with new technologies.

David E. Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich., said U.S. automakers are not as profitable as foreign automakers because their costs are much higher, eventually affecting the bottom line of their suppliers.

“Work rule, age of the workforce, health care issues are probably the 500-pound gorilla that they have to deal with,” he said. “General Motors insures 1 million people here in the States.”

Cole estimates that GM has fewer than 200,000 direct employees, meaning that the rest of the insured are dependents and retirees.

In addition to having fewer retirees, the countries in which many newer European and Asian auto companies reside offer national health care programs.  The United Auto Workers recently entered into contract negotiations with Ford, Chrysler and GM.

“The cumulative health care liability for hourly workers between the three companies [right now]… is in the area of about $100 billion,” Cole said.

Given Methode’s impressive fourth-quarter results, analyst David Leiker of Milwaukee’s Robert W. Baird & Co. Inc. said Methode’s conservative forecast for the 2008 fiscal year is disappointing.

Leiker upgraded his rating of Methode shares to "neutral" from "underperform" in early August.

Some immediate speed bumps will have a negative impact on sales in the near future, Methode's Iske said, but that doesn't change the long-term outlook.

“The automotive market is going to continue to be hit tremendously in the U.S.,” Iske said. “We [also] have some end-of-life business in the power distribution area, so we know that is coming.”

Methode boasts a diverse product portfolio of connectors, sensors and switches developed from the latest technology. Yet people consider it an automotive supplier because of its revenue concentration in the industry.

“If you look underneath and look at what we have, we are a technology company,” Iske said. “Everything revolves around technology.”