Methode Electronics (NASDAQ:METH) announced first-quarter 2006 earnings before the market's opening bell on Friday, delivering $0.13 per stub to its shareholders on net income of $4.7 million. The Chicago-based small cap's earnings equal those of the year-ago period, and its latest net income figure is a near-doppelganger as well. But get this: Sales growth at the electronic-components manufacturer increased significantly, rising from $85 million in the year-ago period to a cool $94 million.
So why aren't earnings higher this time around? It's a good question with an equally good answer: rising costs.
According to the company's announcement, the prices it paid for silicone, urethane, and copper -- all vital components of its manufacturing process -- have climbed recently, dragging on Methode's earnings despite the firm's solid revenue growth.
The question, of course, is how Fools should read those financial tea leaves. Believe it or not, the answer depends -- as so many things seem to these days -- on the price of oil.
Methode derives a significant portion of its income from the products it makes for automobiles. While employee-discount promotions such as those offered by Ford (NYSE:F) and General Motors (NYSE:GM) have recently boosted its sales, the rising price of crude may slow or even depress the auto industry, at least for a short time. If that happens, Methode may have difficulty keeping pace in the near term with its recent revenue ramp-up.
In the long term, the jury's still out, though Methode's execs certainly seem confident. Management anticipates second-quarter sales in the neighborhood of $105 million and earnings of $0.17 to $0.19 per share. For the whole of fiscal 2006, it's guiding toward more than $385 million in sales, and earnings that fall somewhere between $0.56 and $0.63 per share.
A more dispassionate observer, however, might say this: Methode appears to be an intelligently managed company, one with a solid track record of delivering for shareholders. Still, companies such as Amphenol (NYSE:APH), AVX (NYSE:AVX), Molex (NASDAQ:MOLX), and the well-heeled Tyco International (NYSE:TYC) also play on its turf. With that in mind, Foolish investors should compare and contrast those players with Methode before making a purchase here.
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Shannon Zimmerman runs point on the Motley Fool Champion Funds newsletter service and doesn't own any of the securities mentioned above. You can check out the Fool's disclosure policy by clicking right here.
