Is Methode Electronics (MEI) a Buy at $6.99 Amid Strong Earnings Growth and Fair Valuation?

The question of whether Methode Electronics (MEI) is a compelling value investment at $6.99 hinges on a nuanced interplay of its current financial struggles, operational transformation, and long-term growth prospects. While the company's recent earnings report underscores persistent challenges, its valuation metrics and strategic pivot toward high-growth sectors suggest a potential inflection point.

A Tale of Two Realities: Earnings and Guidance

Methode's Q3 2025 results reflect a mixed bag. Revenue of $246.9 million, though exceeding analyst expectations by 3.9%, marked a 15.6% year-on-year decline. Adjusted earnings per share (EPS) of -$0.19 aligned with forecasts but highlighted the company's unprofitability. Operating margins contracted sharply to 1.2% from 3.2% in the prior year, driven by automotive sector headwinds, including delayed and canceled electric vehicle (EV) programs in North America. Yet, management signaled that most of these disruptions have already been priced into the results, with expectations of a stronger second half of the year.

The company reaffirmed its full-year revenue guidance of $950 million and adjusted EBITDA guidance of $75 million, both slightly above analyst estimates. This suggests a degree of confidence in navigating near-term volatility, particularly as operational improvements in Egypt and Mexico-key manufacturing hubs-begin to materialize.

A Historical Context: Decline and Resilience

Methode's financial trajectory since 2020 has been marked by sharp declines. Net income peaked at $123 million in 2020 but turned negative in 2025, with a $63 million loss reported. Quarterly losses, such as the $30.4 million pre-tax loss in Q4 2024, underscore the severity of its challenges. The company's EPS has contracted at an average annual rate of -59.6%, far outpacing the 9.7% growth of the broader electronics industry.

However, this narrative is not entirely bleak. Methode has demonstrated resilience in non-automotive segments, notably in data center power solutions, where it achieved record sales. Positive free cash flow in Q3 2025 further hints at improving liquidity, even as the company grapples with declining revenues.

### Valuation: A Bargain or a Trap?
Methode's valuation metrics present a compelling case for value investors. Its price-to-book (P/B) ratio of 0.36 indicates the stock trades at a significant discount to its book value, while the price-to-free cash flow (P/FCF) ratio of 4.73 suggests it is undervalued relative to its cash-generating capacity. The negative P/E ratio of -5.59 is a red flag for traditional value metrics, though it is offset by analyst forecasts of an EPS turnaround. By 2026, earnings are expected to rise from a projected -$1.39 to $0.41 with EBITDA anticipated to more than double, despite a $100 million sales decline.

This optimism is rooted in Methode's operational overhauls. Management's focus on cost discipline and plant efficiency-particularly in Egypt and Mexico-has already yielded improvements. For instance, the Industrial segment reported a 23.1% operating margin in Q3 2025, outperforming the broader company's weaker Automotive and Interface segments.

Strategic Shifts and Growth Leverage

Methode's pivot toward data center power solutions is a critical growth lever. As global demand for data infrastructure accelerates, the company's expertise in power distribution positions it to capture market share in a sector projected to grow at a double-digit rate. This diversification mitigates reliance on the volatile automotive sector, where EV demand is expected to remain subdued.

Moreover, the company's transformation efforts-streamlining operations, reducing overhead, and enhancing supply chain resilience-are designed to create a more agile business model. These steps, if sustained, could drive margin expansion and free cash flow growth, even in a lower-revenue environment.

Risks and Caution

Investors must remain wary of near-term risks. The automotive sector's continued underperformance could delay profitability, while the broader economic climate may dampen demand for EVs and industrial equipment. Methode's ability to execute its transformation plan-particularly in high-cost regions-will be pivotal.

Conclusion: A Calculated Bet

At $6.99, Methode Electronics appears undervalued by traditional metrics, with a P/B ratio of 0.36 and a P/FCF of 4.73 offering a margin of safety. While its current unprofitability is a concern, the anticipated EPS turnaround and EBITDA growth in 2026 suggest a path to value creation. The company's strategic focus on data center solutions and operational efficiency provides a credible foundation for long-term growth.

For value investors with a medium-term horizon, MEI could represent an attractive opportunity-provided they are prepared to weather near-term volatility and monitor the company's progress in executing its transformation. The key question is not whether Methode is a buy, but whether it can deliver on its promises.