Methode Electronics: Navigating EV Headwinds with Data Center Momentum

The global shift toward electrification has created both opportunities and challenges for industrial electronics firms. Methode Electronics (MRDE) exemplifies this duality, as it confronts headwinds in the EV sector while pivoting aggressively toward high-margin data center power products. This strategic reallocation, coupled with operational discipline, positions the company for a rebound in fiscal 2026. Let's dissect how Methode's financial resilience and sector realignment could translate into sustained EBITDA growth—and why investors should take note.

EBITDA Recovery: A Foundation of Operational Discipline

Methode's third-quarter fiscal 2025 results underscore a critical turning point. While automotive sales (a key EV exposure) declined 17.2% year-over-year, the company's adjusted EBITDA rose to $12.3 million, a 29.5% increase from $9.5 million in the prior-year period. This improvement was driven by two factors:
1. Improved product mix: Strong sales of high-margin power distribution products for data centers, which contributed over $80 million in full-year revenue.
2. Cost control: Reduced breakeven points through restructuring, delayed capex, and tighter working capital management. Free cash flow jumped to $19.6 million in Q3, up 60% year-over-year.

The comparison reveals its divergence from peers, suggesting it is outperforming in operational efficiency. This resilience is critical as EV sector challenges persist.

Strategic Shift: From EV Turbulence to Data Center Dominance

Methode's reallocation of resources from underperforming EV programs to data center infrastructure is its most compelling growth lever. The automotive segment's struggles—stemming from a lighting program roll-off and delayed EV program ramp-ups—forced a hard reset. However, management's decision to prioritize power products for data centers has already paid dividends:

• Data center sales grew 4.5% to $111.9 million in fiscal 2025, with record power product sales.
• Long-term contracts: The segment's recurring nature and scalability in a cloud-driven economy provide visibility.

The chart highlights this strategic rebalancing. While EV sales faltered, data center sales held steady, shielding Methode from sector-specific volatility.

EV Headwinds: Mitigating Risk, Not Eliminating It

The EV market's slowdown—driven by overcapacity, supply chain disruptions, and margin pressures—is no secret. Methode's automotive sales fell sharply in 2025, but management's response was proactive:
- Program prioritization: Focusing on higher-margin EV programs with proven demand.
- Geographic diversification: Expanding into markets like China, where data center buildouts are accelerating.

The comparison shows Methode is more exposed to EV risks than peers like Eaton or Schneider Electric, but its swift pivot has insulated it better than anticipated.

2026 Outlook: EBITDA Growth and Valuation Catalysts

Methode's fiscal 2026 guidance is bullish: net sales to exceed 2025 levels, with pre-tax income positive and significantly higher. Key catalysts include:
1. Data center tailwinds: Global hyperscalers are investing ~$200 billion annually in data infrastructure through 2026, per IDC.
2. Tariff mitigation: Strategic supplier shifts and local production in key markets could reduce costs by 10-15%.
3. Balance sheet strength: Positive free cash flow and reduced leverage (debt-to-EBITDA now <1x) support reinvestment without dilution.

Investment Thesis: Near-Term Value, Long-Term Upside

Methode's stock trades at ~8.5x fiscal 2025 EBITDA, a discount to peers trading at ~12x. This undervaluation reflects EV-related concerns, but the data center pivot could narrow the gap.

• Near-term catalyst: Q4 2025 results will test whether free cash flow momentum holds.
• Long-term thesis: Data center demand is structural, not cyclical. Methode's power systems—critical for 400/800V DC architectures—are a niche play in a $20+ billion addressable market.

shows underperformance during EV-driven volatility, but a rebound could follow Q4 results.

Conclusion: A Buy with a Strategic Horizon

Methode Electronics is navigating a tough sector with clear-eyed focus. Its EBITDA recovery, data center dominance, and cost discipline suggest it can grow earnings meaningfully in fiscal 2026. While EV risks linger, the stock's valuation and secular data center tailwinds justify a buy rating, with a 12-18 month price target of $35–$40 (vs. current $28). Investors should consider this a long-term play on infrastructure electrification—where Methode is no longer a follower, but a leader.

Risks: Delays in data center contract wins, EV sector recovery, or macroeconomic slowdowns could pressure margins. Monitor free cash flow trends closely.*