Custom-engineered solutions manufacturer Methode Electronics (NYSE: MEI) announced better-than-expected revenue in Q2 CY2025, but sales fell by 7% year on year to $240.5 million. The company’s full-year revenue guidance of $950 million at the midpoint came in 2.6% above analysts’ estimates. Its non-GAAP loss of $0.22 per share was 12% above analysts’ consensus estimates.

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Management CommentsPresident and Chief Executive Officer Jon DeGaynor said, “The Methode transformation journey made further progress in the quarter and is firmly on track, as we continued to reduce costs and improve execution. A $9 million increase in operating income on $18 million in lower sales is clear evidence of that progress. Our data center business grew again and remains on pace for a strong year. The overall business delivered strong free cash flow for the third quarter in a row, and we have now reduced our net debt by $41 million over the last three quarters.”

Company Overview

Founded in 1946, Methode Electronics (NYSE: MEI) is a global supplier of custom-engineered solutions for Original Equipment Manufacturers (OEMs).

Revenue Growth

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Methode Electronics’s 1.7% annualized revenue growth over the last five years was sluggish. This fell short of our benchmarks and is a rough starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Methode Electronics’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 6.8% annually. Methode Electronics isn’t alone in its struggles as the Electrical Systems industry experienced a cyclical downturn, with many similar businesses observing lower sales at this time.

This quarter, Methode Electronics’s revenue fell by 7% year on year to $240.5 million but beat Wall Street’s estimates by 10.8%.

Looking ahead, sell-side analysts expect revenue to decline by 8.2% over the next 12 months, similar to its two-year rate. This projection is underwhelming and suggests its products and services will see some demand headwinds.

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Operating Margin

Methode Electronics was profitable over the last five years but held back by its large cost base. Its average operating margin of 5.6% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.

Looking at the trend in its profitability, Methode Electronics’s operating margin decreased by 14.6 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Methode Electronics’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

This quarter, Methode Electronics’s breakeven margin was up 3.1 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Earnings Per Share

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for Methode Electronics, its EPS declined by 19% annually over the last five years while its revenue grew by 1.7%. This tells us the company became less profitable on a per-share basis as it expanded due to non-fundamental factors such as interest expenses and taxes.

We can take a deeper look into Methode Electronics’s earnings to better understand the drivers of its performance. As we mentioned earlier, Methode Electronics’s operating margin expanded this quarter but declined by 14.6 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Methode Electronics, its two-year annual EPS declines of 63.7% show it’s continued to underperform. These results were bad no matter how you slice the data.

In Q2, Methode Electronics reported adjusted EPS of negative $0.22, up from negative $0.31 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street is optimistic. Analysts forecast Methode Electronics’s full-year EPS of negative $1.06 will flip to positive $0.04.

Key Takeaways from Methode Electronics’s Q2 Results

We were impressed by how significantly Methode Electronics blew past analysts’ EBITDA expectations this quarter. We were also excited its revenue outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this was a good print with some key areas of upside. The stock traded up 9.5% to $8.20 immediately after reporting.

Methode Electronics had an encouraging quarter, but one earnings result doesn’t necessarily make the stock a buy. Let’s see if this is a good investment. We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.