university of illinois at urbana-champaign applied portfolio management methode electronics cindy...
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University of Illinois at Urbana-Champaign
Applied Portfolio Management
Methode ElectronicsCindy Anggraini Lu Han Rahul Gohil Vanditha R Zhi Cheng (Nicole) Low
December 1, 2015
ANALYSTS
Cindy [email protected]
Rahul [email protected]
Vanditha R. [email protected]
Zhi Cheng (Nicole) [email protected]
Holding100 shares on Apr 13,
2015
Purchase Price = $46.61
Current Price =
$36.08 at Nov 30,
2015
Return = -22.59%
Source: Yahoo Finance
AGENDA
Company Overview Macro-economic Overview
Financial AnalysisTechnical Analysis
Projection & ValuationRecommendation
Company Overview
Macro-economic Overview
Financial Analysis
Technical Analysis
Projection &
Valuation
Recommendation
Company Overview: Introduction
Automotive
Interface
Power Products
Other
Business Description
Manufacturer of component and subsystem devices
Year Founded 1946
Market Cap $1.4 billion
TTM P/E 13.78
Primary Industry Electronic Manufacturing Services
Source: Yahoo Finance
Company Overview: Operating Coverage
USA Europe Asia
The company is operating globally, with mostly in USA, Europe, and Asia The biggest facilities are in Mexico and Malta
Company Overview: Revenue Breakdown (2015)
Product Geographic
Source: Investor Presentation
Company Overview: Automotive Segment
Integrated Center Console
• Ford• General Motors• Renault• Fiat• Aston Martin
Transmission Solutions
• General Motors• Ford• VW
Torque Sensor
• BMW
Hidden & Ergonomic Switches
• Global Market Share of 18%
• European Union Market Share of 35%
Source: Investor Presentation
Company Overview: Interface Segment
Consumer Touch Panels
• High resolution LCD touchscreens
• Over 30% of commercial/industrial solid state touch interfaces in North America
Industrial User Interfaces
• Radio Remote Control Solutions
Data Center Infrastructure
Solutions• Fiber Optic &
copper cable assemblies
• Uninterruptable Power Supply
Main Clients
• Coca Cola, John Deere, Whirlpool, Kitchen Aid, Maytag, Hitachi
Source: Investor Presentation
Company Overview: Power Products Segment• Braided flexible cables• EV bus bar assemblies• Nissan Leaf
• North America & Europe• Each vehicle requires 48 battery modules• Three Methode assemblies utilized on each battery module
• Tesla S
• PowerRail• Power distribution system• Currently shipping to “Big Data” customer
Source: Investor Presentation
Company Overview: Future Projects
SmartCenter StackWireless cell phone connection, Vehicle touchscreens
HighPerTouchEnhanced touch performance
10G Copper Transceiver ModulesMore cost effective than optical counterparts
Dabir SurfacesNew technology for pressure ulcer prevention
1
2
3
4Source: Investor Presentation
Company Overview: SWOTSt
reng
ths • Distribution
and sales network
• Tax advantages due to global locations
• Low debt financing
Wea
knes
s • High exposure to automotive sector, esp. Ford and GM
• Lengthy sales cycle
• Price of raw materials
• Highly competitive market environment
• Exchange rate
Opp
ortu
nitie
s • Engagement in M&A activity
• Diversifying product portfolio
Thre
ats • Changes in
technology• Continued
pressure to lower prices
S W O T
Company Overview: Porter 5 Forces
Bargaining Power of Buyers:
High
Bargaining Power of Suppliers:Moderate
Threats of New
Entrants: Low
Threats of Substitutes:
Moderate
Rivalry:Moderate
Porter 5 Forces
Bargaining Power of Buyers – HighContinued pressure to lower prices to avoid competition
Bargaining Power of Suppliers – ModerateAvailability of raw materials from different suppliers
Threat of new entrants – LowHigh initial investments
Threat of substitutes – ModerateCustomized products for each manufacturer
Rivalry among existing competitors – ModerateCompetition on Price and Technological advancements
Company Overview
Macro-economic Overview
Financial Analysis
Technical Analysis
Projection &
Valuation
Recommendation
Macro-economic Overview
Automotive Industry
• US vehicle sales will rise to record peak in 2017
• Tesla S and Nissan leaf among top 5 electric car models
Electronic Industry
• Rapidly-increasing data traffic is driving the demand for data storage
• Global power electronics market growth rate to fall post 2018
Heavy Equipment Industry
• Agriculture equipment demand to fall in US, offset by Asia
• Heavy construction equipment market driven by emerging markets
Source: KPMG’s Global Automotive Executive Survey 2015, Clean Technica, DatacenterDynamics, HIS Technology, PR Newswire, Freedonia Group
Macro-economic Overview
Automotive Outlook Based on Sales Volume Long-term Touch Module Shipment Forecast
Source: IHS, KPMG Global Automotive Survey
• GM & Ford will hold their position by sales volumes in 2020• Touch Panel Module shipments to rise but at lower growth rates
Company Overview
Macro-economic Overview
Financial Analysis
Technical Analysis
Projection &
Valuation
Recommendation
Financial Analysis: Agenda
• Financial Highlights• Liquidity and Leverage Ratio• Profitability and Activity Ratio• Greenblatt and Dupont Ratio
Financial Highlights: Revenue Breakdown (2015)
Automotive Interface Power Products
Source: 10-k 2015
Financial Analysis: Liquidity & Leverage Ratio
Liquidity Ratio Leverage Ratio
Source: 10-k 2015
Financial Analysis: Profitability & Activity Ratio
Profitability Ratio Activity Ratio
Source: 10-k 2015
Financial Analysis: Greenblatt & Dupont Ratio
Greenblatt Ratio
Dupont Analysis
2011 2012 2013 2014 20150.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
10.60%6.94%
18.10%
27.90%
42.42%
4.26% 4.15%
7.83% 7.08% 7.34%
EBIT/Tangible Asset EBIT/EV
2011 2012 2013 2014 2015Tax Burden 134.48% 73.68% 107.39% 126.61% 83.69%Interest Burden 90.63% 100.00% 96.68% 103.13% 107.66%Operating Profit Margin 3.74% 2.45% 7.54% 9.52% 12.73%Asset Turnover 1.26x 1.24x 1.53x 1.49xLeverage 1.44x 1.54x 1.48x 1.39xROE 3.27% 14.95% 28.21% 23.77%
Source: 10-k 2015
Company Overview
Macro-economic Overview
Financial Analysis
Technical Analysis
Projection &
Valuation
Recommendation
Technical Analysis
Methode Electronics
Big drop (around 30%) on June 25, 2015 because company’s financial results were not able to meet the investor expectations.
Source: Yahoo Finance
Company Overview
Macro-economic Overview
Financial Analysis
Technical Analysis
Projection &
Valuation
Recommendation
Projection and Valuation: Agenda
Assumptions
Revenue Projection
Valuation : DCF and Comparable
1
2
3
Projection and Valuation: Assumptions• Management guidance for 2016• Sales - $830-$865mm• Operating Income - $108-$119mm
• Continue to invest in core business and grow• Maintaining strong and flexible balance sheet with
ample liquidity• Targeting 5 year EBITDA CAGR of 9-10%• Auto sales to peak in 2017 and drop after that
Source: Investor Presentation
Projection: Revenue
Revenue Projection Revenue Projection per Segment
Projection: Revenue per Segment
Interface
Power Products
Automotive
Valuation: DCF
1 2 3 4 52016E 2017E 2018E 2019E 2020E
Net Income 99.1 118.4 141.0 165.8 192.0Depreciation 18.1 19.6 21.4 23.5 26.0CapEx 26.0 30.8 36.5 42.7 49.3
Increasein Acc Receivable 13.8 35.8 41.4 40.3 42.8Increase in Inventory 10.8 16.1 18.5 14.3 19.9Increase in Acc Payable 6.7 2.4 3.3 3.9 6.2Net Changes in Working Capital 17.9 49.4 56.6 50.6 56.5Free Cash Flow 73.4 57.8 69.4 96.0 112.3 1,182.0Discounted Cash flows 64.4 44.5 47.0 57.1 58.6 617.2Net Present Value of the firm 888.9Value of Debt 5.0Value of Equity 883.9
Discount Rate 13.9%Long Term Growth Rate 4.0%No of Shares OutStanding (mn) 38.5
DCF Valuation
Assumptions
in $ million (unless stated)
Terminal ValueChanges in net working capital
Share Price USD 23.0
Valuation: Sensitivity Analysis
22.97 3.00% 3.50% 4.00% 4.50% 5.00%12.88% 23.72 24.69 25.77 26.98 28.3413.38% 22.48 23.34 24.30 25.36 26.5413.88% 21.36 22.13 22.97 23.91 24.9514.38% 20.33 21.02 21.78 22.61 23.5314.88% 19.40 20.02 20.69 21.43 22.25
Valuation: Comparable Methodology
Industry: Electronic Manufacturing
Services
Sector: Technology
Similar Product Mix
Similar End Markets
International Exposure
CTSDesigns and manufactures sensors and actuators, and electronic components worldwide.
AmphenolDesigns and manufactures electrical, electronic, and fiber optic connectors worldwide.
AVXDesigns and manufactures electronic passive components and interconnect solutions worldwide.
Valuation: Comparable Valuation Result
LTM EV/Revenue LTM EV/EBITDA LTM P/E LTM P/BV
CTS Corp. (CTS) 1.4x 8.4x 22.8x 2.7x
Amphenol Corp. (APH) 3.3x 14.1x 22.9x 80.5x
AVX Corp. (AVX) 1.1x 5.9x 11.0x 1.2x
Median 1.4x 8.4x 22.8x 2.7x
Implied Price 35.8 37.1 60.6 31.6
Equally weighted average price per share: $41.3
Valuation: Background of Comparison
MEI is a unique company
Most of its revenue comes from automotive
Market treats MEI similar to its customers
1
2
3
Valuation: Comparable Valuation Result (Cont.)
Equally weighted average price per share: $32.2
LTM EV/Revenue LTM EV/EBITDA LTM P/E LTM P/BV
Whirlpool Corp. (WHR) 0.8x 8.7x 19.0x 2.7x
General Motors Company (GM) 0.6x 6.0x 13.3x 1.7x
Ford Motor Co. (F) 1.1x 10.8x 12.0x 2.1x
Deere & Company (DE) 2.1x 13.8x 13.8x 3.8x
Median 1.0x 9.8x 13.6x 2.4x
Implied Price 25.7 42.3 36.0 24.6
Company Overview
Macro-economic Overview
Financial Analysis
Technical Analysis
Projection &
Valuation
Recommendation
Recommendation
SELLComparable Valuation
DCF Valuation
Revenue Projection
Industry Factor
Sell 100 shares @market price
THANK YOU