Methode Electronics Inc (MEI): A Dead Cat Bounce or Sustainable Rally?

On Thursday, small cap electronics stock Methode Electronics Inc (NYSE: MEI) soared 43.07% after beating earnings expectations and boasting its guidance. However, the stock sank around 10.5% the day before the Thursday morning earnings report came out. So was the earnings report and guidance the start of a rally or just a dead cat bounce for investors?

What is Methode Electronics Inc?

Small cap Methode Electronics is a leading developer of custom-engineered and application-specific products and solutions utilizing the latest technologies and serving a diversified group of customers (including fifteen of the Fortune Global 100 and fifty-two of the Global 500 companies) in four market areas: User Interfaces, Sensor and Switches, Power and Data. Products or applications range from biometric identification utilizing the unique characteristics of human skin structure; to magnetic signature sensing of mechanical and electrical properties; to solid-state touch sensitive switches used in appliances and automobiles.

What You Need to Know About or Be Warned About Methode Electronics

There was no news about Methode Electronics in the days up to the Thursday morning earnings report although Wednesday share volume was 2,028,660 while the Thursday share volume was 4,504,521 – well above the 432,514 daily trading average.

On Thursday morning, Methode Electronics reported financial results for the Fiscal 2014 second quarter where Fiscal 2014 net sales grew 47.1% to $190.9 million year over year due to strong sales for the General Motors center console programs, new product launches in the European Automotive and North American Power Products operations, higher sales in Asia and strong appliance sales. Net income decreased $3.6 million to $19.8 million (62 cents per share) from $23.4 million (51 cents per share). Bottom line results excludes a $20 million settlement between Methode Electronics and various Delphi parties who agreed to settle all Delphi related litigation matters. As part of the settlement, Methode Electronics assigned certain patents to Delphi and entered into a non-compete with respect to the related technology.

For the full fiscal year ending in this April, Methode Electronics now expects revenue for the full fiscal year between $720 million and $750 million, up from its previous guidance of between $670 million and $700 million; plus earnings between $1.70 per share and $1.90 per share, up from a previous guidance of between $1.40 per share and $1.60 per share. In the earnings call transcript (available on Seeking Alpha here), Methode Electronics' CEO explained:

"The low-end of the guidance reflects our concern regarding stabilization in the European economy, as well as potential softening in our Interconnect and Power Products segments over those achieved in the first half and possible production delays of new products. The high-end of the range anticipates stabilization in Europe and higher domestic automotive revenues, and as I mentioned on last quarter's conference call, current releases are indicating that second half European sales will be below the first half."

In other words, Methode Electronics' future performance is somewhat dependent on the European economy – something beyond its control.

Share Performance and Valuation: Methode Electronics

On Thursday, Methode Electronics rose 43.07% to $35.28 (MEI has a 52 week trading range of $8.50 to $35.58 a share) for a market cap of $1.31 billion plus the stock is up 251.7% since the start of the year and up 313.1% over the past five years:

Here is the latest technical chart for Methode Electronics:

Otherwise, small cap Methode Electronics has a trailing P/E of 26.33 and a forward P/E of 18.67 plus a forward dividend of $0.28 for a dividend yield of 1.00%.

The Bottom Line. While Methode Electronics' earnings report and guidance was pretty good, a 43.07% bounce is overkill (perhaps the result of shorts covering their positions). New investors might want to stay clear while those already in should probably take some chips off the table - especially in light of the year to date performance.