Sensata (ST) reported 4Q17 organic sales +5.2% and adjusted EPS +14.5%. For 2017, organic sales growth was 4%, and adjusted EBIT margin expanded by 100bps. 2017 was a strong year of new design wins for Sensata, leading the way to another year of growth. The company is performing in line with our expectations regarding margin improvement and deleveraging, paving the way for more M&A in the future. We are maintaining our price target and position size.
Current Price: $56.2 Price Target: $61
Position Size: 1.67% Performance LTM: +32.6%
Thesis Intact. Key takeaways from the quarter:
1. Reported Q4 2017 sales growth was +6.6% (+5.2% organic growth), and EBIT grew 7.8% organically due to higher profitability from acquired businesses
a. HVOR sales up 20.5% organic (13.5% of sales) as North America On-Road and construction markets remain strong
b. Industrial, HVAC and Other sales up 4.1% organic (26% of sales), thanks to strength in Asia and need for more efficient products
c. Auto sensors sales 3.4% organic (60% of sales) driven by the Chinese auto market, and an acceleration in content growth
d. Overall organic adjusted EBIT margin expanded by 50bps, from M&A cost synergies, operating leverage and productivity gains
e. Adjusted EPS was up 14.5%
f. Deleverage is on track, now standing at 3X net debt/EBITDA (from 4.6X at the end of 2015). This is a good testament of ST’s cash flow strength
g. For the year, FCF increased 5.6%
2. 2018 guidance
a. Organic sales growth to be +3% to +5%, FX to have a positive impact of +1% to +2%
i. Growth is driven by market & content growth in HVOR, new design wins in Auto, and China tailwind
ii. Global auto market to be flat to down in 2018
b. Continued opportunity for EBIT margin, targeting 110bps midpoint expansion
i. Mostly from gross margin
ii. R&D to increase to support new design wins
iii. SG&A leverage from integration of new businesses
c. EPS growth +9% to +13% ex-FX (+12-17% including FX)
3. Valuation unchanged
a. We are maintaining our $61 price target
b. Re-domiciliation to the UK will bring better flexibility for share repurchases in the future
c. FCF yield of 4.7%
The Thesis on Sensata
• Sensata has a clear revenue growth strategy (content growth + bolt-on M&A)
• ST is diversifying its end markets exposure away from the cyclical auto sector over time through acquisitions, also expanding its addressable market size
• ST is a consolidator in a fragmented industry and still has room to acquire businesses
• Margins should expand as the integration of the prior two deals is under way, regardless of top line growth, and efficiencies in manufacturing are continuously pursued as they are gaining scale
• ST is deleveraging its balance sheet post acquisitions, leaving room for future M&A or a return to share buybacks, and improving EPS growth
$ST.US