Sensata (ST) reported 3Q17 organic sales +3.7% and adjusted EPS +9.5%, beating consensus. Organic sales growth was 3.6% and organic growth in sensors for heavy off-road vehicles (HVOR) was 19.5%. We are maintaining our price target and position size.
Current Price: $49.3 Price Target: $51
Position Size: 1.6% Performance since inception (1/12/17): +19.9%
Thesis Intact. Key takeaways from the quarter:
- Reported Q3 2017 sales growth was +3.7% (+3.6% organic growth), and EBIT grew 7.1% organically due to operating leverage and acquired businesses
- HVOR sales up 19.5% (15% of sales)
- Industrial, HVAC and Other sales up 5.2% (25% of sales)
- Auto sensors sales -0.2% (60% of sales) strength in China, but decline in Diesel cars in Europe hurt revenue growth
- Overall organic adjusted EBIT margin expanded by 90bps, thanks to productivity initiatives and growing profitability of acquired businesses
- 2017 guidance was raised
- 2017 organic sales growth to be 3-4% from 2-3%. Growth is driven by content growth, and not so much from end market growth in the auto sector
- Expecting Q4 organic EPS growth of 7-12%
- Global auto market flat y/y (no change in view)
- EPS growth +10-11% ex-FX
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- Continued opportunity for margin expansion
- Costs reduction
- Completion of integrations of new businesses
- Volume growth provides more leverage
- Valuation: unchanged, thesis is playing out this quarter
- We are maintaining our $51 price target
- The continued decrease in leverage from strong cash flow generation makes us confident ST will be able to improve shareholder return in 2017 (through M&A/share buyback or potential dividend)