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Morningstar | 4Q Revenue Miss Doesn’t Affect Sensata’s Long-Term Trend; Maintaining $56 FVE

Sensata Technologies’ fourth-quarter results were mixed, as revenue missed management’s prior guidance and margins contracted greater than we expected due to the slowdown in automotive and industrial demand in the final weeks of 2018. That said, guidance for full-year 2019 was largely in line with our prior estimates with the expectation of solid revenue and profit growth. We are maintaining our previous fair value estimate of $56 per share. Barring a recession, curbing the content increases occurring throughout the broader industrial market, we believe Sensata is poised for solid and sustainable growth. Shares traded up slightly, approaching our unchanged fair value estimate. Though there is little margin of safety at current prices, we would be eager buyers of the narrow-moat company on a pullback.

Fourth-quarter revenue increased by 1% year over year to $848 million, a 3% sequential decline. By segment, performance sensing sales grew by just 0.7% year over year, declining 1.6% sequentially. Sensing solutions increased by 1.5% versus the year-ago period while declining nearly 7% sequentially. The declines were primarily a function of steep contraction in China, along with foreign exchange and Sensata’s sale of its valve business. The impact of China weakness was particularly strong in industrials, where management noted the PMI had reached its lowest point in three years. However, while Chinese auto unit production declined 15% year over year in the fourth quarter, Sensata’s China auto revenue grew by 0.6% on an organic basis, evidence of the ongoing strength of the broad automotive content trend. The heavy-vehicle off-road market continued strong year-over-year growth, increasing by more than 13% during the quarter amid weakness from the North America trucking market. Adjusted operating margins expanded by 80 basis points year over year to 24.7%, despite the lower volumes and increased investment in research and development.

Management expects to continue the investments in R&D and capital expenditures throughout 2019 in an effort to remain ahead of fast-moving secular trends. Revenue guidance for the upcoming quarter assumes sales decline by nearly 4% year over year to $852 million at the midpoint. The market weakness experienced at the end of the year is expected to continue throughout the year, while inventory corrections drive the firm’s expected revenue decline in the first quarter. However, despite softening end markets, Sensata expects revenue growth for the full year to be in the mid- to low single digits on account of continued content gains and ramping products in the back half of the year. Adjusted earnings per share in the first quarter are expected to be flat year over year to $0.85 at the midpoint of guidance, while management expects increasing profitability throughout the year leading to full-year 2019 adjusted earnings per share increasing by nearly 10% at the midpoint.