Methode Electronics' Turnaround Play: Riding Data Center Winds and Restructuring to Turn the EBITDA Tide

Methode Electronics (NYSE: MTD) is navigating a crossroads in its fiscal 2026 journey, balancing near-term automotive sector headwinds with a strategic pivot to data center opportunities. While the company faces a projected $100 million sales decline in electric vehicle (EV) programs due to program roll-offs and delayed launches, its operational restructuring and sector-specific tailwinds in industrial electronics could fuel an EBITDA turnaround. Let's dissect the path to recovery and its investment implications.

The Automotive Sector: Challenges Amid Megatrends

The automotive sector, once a growth engine, has become a source of volatility for Methode. Reduced demand from a major EV customer—most notably Stellantis—and program cancellations have led to inventory write-downs and sales declines. In Q4 2025, Automotive sales plunged 22.6% year-over-year, with EV-related revenue dropping to 20% of net sales from 24% in the prior quarter. A key issue is the roll-off of high-margin programs like the North American center console and Asian EV lighting systems.

Yet Methode remains bullish on the long-term EV "megatrend," even as it shifts resources to higher-growth areas. This pragmatic approach highlights the company's ability to adapt to market realities—a critical trait in volatile sectors like automotive.

Pivot to Data Centers: The New Growth Engine

The company's strategic restructuring is centered on capitalizing on data center demand, a sector benefiting from the global shift to cloud computing and AI infrastructure. Methode's Industrial segment, driven by power distribution products for data centers, has already delivered record sales. In Q4 2025, Industrial sales rose 13.1% year-over-year to $132.6 million, with operational income surging to $26.2 million (19.8% of sales).

This pivot is critical. Management expects data center growth to offset EV sales declines, with the segment's high margins and recurring demand positioning it as the primary driver of FY26 EBITDA. The $70–$80 million EBITDA target for 2026 (up from $42.5 million in FY25) hinges on this transition.

Operational Restructuring: Cost Controls and Structural Overhaul

Methode's leadership is implementing sweeping changes to improve efficiency. Key moves include:
- Reducing overhead: The board was cut from 10 to 7 directors, and headquarters relocated to an owned facility to slash costs.
- Trimming debt: Net debt dropped to $214.0 million in Q4 2025 from $224.1 million in Q3, aided by delayed capex and reduced working capital.
- Free cash flow revival: Cash flow hit $26.3 million in Q4, the highest since 2023, as scrap and freight costs fell.

A dividend cut to $0.07 per share further signals a focus on financial discipline. These steps are critical to de-risking the turnaround.

Risks and Uncertainties

The strategy isn't without risks. Methode's outlook depends heavily on executing 53 new programs over two years (33 still pending), with EV program delays and tariff mitigation efforts (e.g., reshoring production) adding uncertainty. Geopolitical risks, such as supply chain disruptions or macroeconomic slowdowns, could also dampen data center demand.

Investment Thesis: A High-Reward, High-Risk Play

Methode's FY26 EBITDA turnaround hinges on three pillars: data center adoption, new program execution, and cost discipline. If successful, the 100%+ EBITDA growth could revalue the stock significantly. However, investors must weigh the risks of execution failure or sector slowdowns.

Buy Signal: Consider a position if data center sales continue to outperform (e.g., Industrial segment growth >10% sequentially) and new program launches stay on track.

Hold Signal: Maintain caution if EV-related write-downs expand or new program delays emerge.

Sell Signal: Avoid if tariffs or geopolitical issues disrupt supply chains, or if FY26 EBITDA falls below $60 million.

Conclusion

Methode Electronics is a classic turnaround story: a company leveraging restructuring and sector tailwinds to offset cyclical headwinds. The data center pivot represents a compelling growth lever, but execution remains key. For investors willing to take on the volatility, Methode's potential EBITDA rebound makes it a stock to watch closely in 2026.