Bull of the Day: Methode Electronics (MEI) - Bull of the Day

Looking for companies benefiting from the strength in auto sales? Look no further than Methode Electronics (MEI) which just posted top and bottom line beats and raised full-year guidance.

Methode manufactures component devices world-wide for Original Equipment Manufacturers of information processing and networking equipment, voice and data communications systems, consumer electronics, automobiles, aerospace vehicles and industrial equipment. Products employ electrical, electronic and optical technologies as sensors, interconnections and controls.

Big Beats in Cars

On September 4, Methode reported EPS of $0.55 vs. $0.36 one year ago (+53%), beating the consensus estimate of $0.40 by 37.5%. They also raised full-year guidance by $0.20-0.25 (nearly a dime more than the Q1 beat) to $2.10-2.20, well above the prior consensus of $1.97. This upside came primarily from a 30% revenue increase, largely due to better than expected demand from their automotive industry customers.

Big Boost to Guidance

Expected revenue for FY15 is now $870M-$885M, up from a prior range of $835M-$860M. This is mainly due to better expectations around the company's automotive program mix. The company raised EPS guidance from $1.85-$2.00 to $2.10-$2.20, mainly due to higher operating leverage and margin upside within its automotive sector.

Estimates Had Been Slipping, But Look Now...

To get a good idea of how stock prices tend to track earnings estimate revisions (EER), there is no better visual tool than the Zacks proprietary Price & Consensus chart. You can instantly see the dynamic relationship between EER and stock advances, or declines. Here is the view for MEI since the EER that moved the stock back to a Zacks #1 Rank Strong Buy...

Though not always a 1-to-1 correlation on a percentage basis, this pattern is clearly repeated time and again in thousands of stocks: upwards EER leads to upward stock movement, while downward EER usually precedes downward price trends.

Now that MEI has made new all-time highs above $40, former resistance at $38.50 may now become support and the stock may leave that gap up from $35 untouched for a long while as long as these earnings trends keep up.

Following the Whale Action

I recently bought MEI after their blow-out earnings report. One of my criteria for doing so, besides the solid fundamentals, is strong institutional accumulation. Here's a snapshot of the top holders of the stock at the end of Q2 on June 30. Notice that the existing holders were net buyers.

MEI "Top 21" Holders (click on image to enlarge)

FMR (Fidelity), Eaton Vance, and the $5.6 billion Kalmar Investments, who increased their MEI position by 118%, are all investment "whales" I am very willing to follow in this name.

And though the giant $143 billion Dimensional Fund Advisors trimmed their stake by 4%, I suspect the largest holder of MEI has their sights set on Methode going much higher in a strengthening economic cycle.

Disclosure: I own MEI shares for the Zacks FTM Trader.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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