EUR 850.00 For Business Accounts Only

Morningstar | Sensata’s Solid Quarter Highlights Content Growth in the Face of Cyclicality; Maintaining $56 FVE

Sensata Technologies’ third-quarter results were roughly in line with our prior forecast as revenue and adjusted earnings edged near the high range of management’s guidance. In our view, the market has thus far been too bearish regarding the impact of regional slowdowns and tariffs on Sensata’s top-line prospects. We remain positive on the long-term secular trends driving top-line growth and management's ability to improve profitability. We are maintaining our fair value estimate of $56. Shares were up over 8% on the solid results and continue to trade in 4-star territory. We suggest investors take a close look at the narrow-moat sensor company.

The heavy-vehicle and off-road market, or HVOR, maintained strong growth with sales increasing by 19% year over year and now accounting for 16% of total revenue. Like the automotive market, HVOR is benefiting from increased efficiency requirements and the electrification of heavy vehicle cabins. Sensata continues to see strong design traction for content within these markets with TPMS, “steer-by-wire,” haptics, and other connectivity programs helping to support our long-term outlook of high-single-digit growth over our forecast period. Automotive sales increased by 5% year over year, with particularly strong performance in China during the quarter. We expect this growth to continue into 2019 due to continued content programs currently underway and as OEMs ramp to meet regulations.

Revenue in the third quarter grew 7% year over year, while declining by more than 4% sequentially, in line with guidance. Sales within the Performance Sensing segment grew by nearly 8% versus the prior-year period while Sensing Solutions posted 4% growth over the same period. Although Sensata increased investments and faced tariff impacts, its tariff mitigation plan helped increase operating margin by 50 basis points. Adjusted earnings per share increased by 13% over the prior-year period to $0.91, near the high end of previous guidance.

Sensata also provided details on the pending acquisition of GIGAVAC, which the firm previously announced in September and is expected to be completed in the fourth quarter of 2018. We were encouraged by the roadmap that the firm provided for content gains in autos, noting that with GIGAVAC on board, Sensata is able double its content dollars per electric vehicle due to the firm’s strong portfolio of electrical protection products. GIGAVAC currently has an annual run rate of $80 million and less than half of the revenue comes from the automotive market, but with Sensata’s existing relationships in Tier 1s and OEMs, we expect the latter will be able to leverage the technology into other electrification platforms.
Guidance for the fourth quarter is for revenue increasing 3% year over year to $865 million and for adjusted operating margin to further expand to nearly 25%. Management reiterated the firm’s long-term goals of 5% revenue CAGR and 250 basis point adjusted operating margin improvement between 2017 and 2020, and we believe the firm is on track to meet those ambitions as the secular trends surrounding increased electronic content per vehicle show no signs of waning.