EUR 850.00 For Business Accounts Only

Morningstar | ST Updated Forecasts and Estimates from 01 May 2019

Narrow-moat Sensata Technologies kicked off the year with a solid quarter as total revenue slightly exceeded the firm’s prior guidance and adjusted earnings fell in line. Heavy vehicle and off-road (HVOR) sales were very strong, while automotive declines were modest and consistent with softness in global car sales. Market conditions in both China and, increasingly, Europe remain near-term headwinds, but design wins and ramps continue to support our long-term thesis. Aside from modestly adjusting expectations for the full-year in light of updated guidance, we are maintaining our current forecast and thus will keep our $56 fair value estimate. Shares have bounced within our 3-star range over the past few weeks, and we would suggest investors wait for a pull-back before adding to or starting a position in Sensata.

First-quarter sales increased by 3% sequentially to $870 million, which represented a 2% year-over-year decline. By segment, Sensing Solutions contributed the most, increasing 10% year over year, in part due to the integration of recently acquired GIGAVAC, while Performance Sensing declined by 3% amid a weaker automotive market. Aerospace and defense sales helped contribute to the solid performance in Sensing Solutions, in line with recent results from Sensata’s competitors, and helped to offset weak demand for industrial control products in China and Europe. Gross margins in the first quarter were down roughly 100 basis points year over year to 33.3% due to seasonal price changes and an elevated number of new product launches. Research expenses to support connectivity and electrification initiatives were slightly higher than we anticipated which, along with the firm’s M&A activity and the gross margin flow through, contributed to adjusted operating margin declining 30 basis points year over year to 21.7%.

Revenue in the second quarter is expected to be down roughly 1% year over year to $902 million at the midpoint of guidance. Adjusted operating income is also expected to be down roughly 6% year over year, while earnings per share are expected to be up 1% year over year due to ongoing stock buybacks.

During management’s discussion of design activity, it provided further details on the pipeline for Sensata’s battery management solutions. While a material revenue contribution from BMS remains years away, due to the long design cycle within transportation and automotive markets, it contributes to our long-term view that Sensata has a healthy pipeline of opportunities capable of supporting mid-single-digit revenue growth and margin expansion over our explicit forecast.