Key Takeaways:
Current Price: $49.7 Price Target: $61
Position Size: 2.01% 1-year Performance: -0.2%
Sensata released its 1Q19 results this morning, in line with Street expectations but better than ours, as companies we monitor had recently been incrementally more negative on the global auto market. Organic growth was ~1%: HVOR outgrew the market growth by 850bps, as did their auto business outperforming by 490bps, thanks to continued strong content growth. Margin pressure should abate as new products grow in volume. They lowered their guidance for the year based on weaker end markets in auto in China and Europe, which is not surprising. The company is continuously looking to streamline its operations to drive higher productivity and react better to lower volumes. Buybacks reduced share count by an impressive 8.3% (a 4 cent boosts to the $0.85 adjusted EPS this quarter). Overall we see the secular growth drivers intact for Sensata, while recent weakness in auto continues to pressure end markets in the near term.
Results by segments:
HVOR: organic growth of 11% led by NA on-road, construction and agriculture markets
Auto: organic revenue decline of 1% was better than expected as Europe saw -5% end market decline and China -17%. Content growth boosted by legislative mandates in Europe (helps offset overall end market decline there). The company is expecting incremental softness in Europe and China for the remainder of the year
Industrial & other: organic revenue decline of 1% led by weakness in housing starts, European PMI and semiconductors
The China leading indicator they monitor is the overall inventory level: they saw an incremental improvement at the end of March in terms of demand but inventory is still very high, so they do not expect this improvement to benefit them in the next few quarters.
Drivers to growth remain valid:
1. Electrification of vehicles:
Auto: agreement for wireless battery management with a Chinese auto manufacturer
HVOR: Gigavac (recently acquired) closed on a large transaction for production of electric buses in Europe
Industrial: won award in China as leading component supplier for charging stations
2. “smart & connected”: winning agreements with truck manufacturers in wireless solutions, and developing wireless sensors for factory automation
HVOR segment strength:
2019 guidance change:
Market assumptions:
· global auto market: -3% to -4%; vs -1% to -2% before
· China auto: -5% to -6%; vs. -3% to -4% before
· global HVOR market: -2%, vs. -1% to -2% before
Organic sales 1% to 4% vs. +2% to 5% before
EPS growth of 6% to 10% vs. 7% to 10%
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
[tag ST]
$ST.US
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109