Automation And EV Repurposing Will Fuel Data Center Growth

Key Takeaways

• Aggressive cost reductions, automation, and facility optimizations are set to drive stronger and more sustainable margin expansion than widely expected.
  
• Strategic pivots toward data center power, EV, and diversified applications position Methode for higher long-term growth and above-peer earnings resilience.
  
• Heavy reliance on the automotive sector, EV program volatility, and global supply pressures create ongoing risks to Methode's revenues, margins, and long-term competitiveness.

Catalysts

Designs, engineers, produces, and sells mechatronic products internationally.

• Analyst consensus expects new program launches and operational improvements to drive modest earnings recovery, but in reality, the company's transformation and deep execution of cost and efficiency levers-such as 500 headcount cuts, $11 million in freight savings, $9 million lower SG&A, and 100 basis points in gross margin increase-suggest EBITDA and net margin expansion could be far greater and more durable than anticipated as these savings are fully realized and compounded by continued automation.
  
• While analysts broadly agree on strong future data center power demand, they may be underestimating Methode's ability to rapidly repurpose EV manufacturing assets and engineering talent for data center power products, enabling outsized revenue growth in this high-margin segment that is already doubling year-on-year and is driven by exponential increases in data intensity and hyperscale buildouts.
  
• The company's global manufacturing footprint and aggressive tariff mitigation capabilities uniquely position it to win incremental business from competitors less able to navigate global supply chain shifts, supporting above-peer long-term revenue growth and more resilient gross margins regardless of geopolitical headwinds.
  
• Methode's deepening proprietary technology and design wins in emerging electric vehicle platforms around the globe offer exceptional potential for recurring, high-content sales as EV adoption accelerates, giving greater multi-year sales visibility and higher overall blended margins compared to legacy programs.
  
• Programmatic rightsizing of facilities, management overhaul, and ongoing portfolio review will likely create substantial further SG&A and COGS reductions, accelerating operating leverage and driving earnings well above analyst expectations as the company transitions to a more diversified, higher-quality revenue base from industrial, IoT, and non-auto applications.

Methode Electronics Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Methode Electronics compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Methode Electronics's revenue will decrease by 0.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -6.0% today to 9.5% in 3 years time.
• The bullish analysts expect earnings to reach $100.4 million (and earnings per share of $2.83) by about August 2028, up from $-62.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 6.9x on those 2028 earnings, up from -3.7x today. This future PE is lower than the current PE for the US Electronic industry at 22.9x.
• Analysts expect the number of shares outstanding to decline by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.08%, as per the Simply Wall St company report.

Methode Electronics Future Earnings Per Share Growth

Risks

• Methode Electronics faces significant revenue risk due to heavy concentration in the automotive end-market, with recent roll-offs and large, sudden declines in EV program demand from Stellantis and other OEMs leading to projected sales decreases of $100 million for fiscal 2026, exposing the company to further cyclical downturns and demand volatility.
  
• Ongoing delays, cancellations, and reductions in EV programs-including a major $200 million downward adjustment in projected EV sales-demonstrate the company's vulnerability to technological shifts and rapid changes in customer priorities, increasing the possibility of further revenue shortfalls and inventory write-downs that could pressure both gross margins and net earnings.
  
• Despite recent gains in operational efficiency, Methode's financial performance is still hampered by persistent issues such as excess and obsolete inventory expenses, historical warranty and quality costs in automotive, and ongoing restructuring charges, all of which point to underlying challenges in supply chain and product launch execution that may continue to weigh on net margins.
  
• The global trend of "deglobalization," rising tariffs, and shifting supply chains could result in higher costs for manufacturing and sourcing; although Methode expects full tariff recovery from customers, there is execution risk, and any failure to achieve full pass-through or adapt the company's global footprint could materially impact operating margins and earnings stability.
  
• The ongoing commoditization of electronic components, coupled with intensified global competition and elevated ESG compliance requirements, threatens Methode's pricing power and may necessitate costly investments in innovation and sustainability; failure to keep pace with industry trends or customer sustainability demands could further erode market share, leading to slower top-line growth and constraining long-term free cash flow and capital allocation.

Valuation

• The assumed bullish price target for Methode Electronics is $14.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Methode Electronics's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $14.0, and the most bearish reporting a price target of just $7.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $100.4 million, and it would be trading on a PE ratio of 6.9x, assuming you use a discount rate of 12.1%.
  
• Given the current share price of $6.66, the bullish analyst price target of $14.0 is 52.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.