Current Price: $50 Price Target: $61
Position Size: 2.51% 1-year Performance: +9%
Key Takeaways:
Sensata released 2319 results, with sales contracting 2.7% due to weaker end markets. During the call, the management team commented on not seeing any auto industry relief near term, with the GM strike adding salt to the injury. However, the thesis on the name is still there, with content growth allowing ST to perform better than the industry it plays in. Its balance sheet is much stronger than it was a couple of years ago thanks to aggressive deleveraging, allowing the company to act on opportunities as they come.
Segments review:
· Automotive organic sales decline of -0.4%: in China, they saw an improvement over last quarter, but sales were still down. In North America, the sector still has positive growth, but they were impacted by the General Motors strike. The European auto market is still weak.
· HVOR organic revenue growth was -6.2% y/y: construction and agriculture end markets are incrementally weaker, experiencing inventory destocking.
· Aerospace & industrial: organic growth was -6.3%, worse than last quarter. China exports were weak, HVAC was impacted by lower demand of refrigerated trucks. Aerospace remains the bright spot.
Based on current market conditions, ST lowered its growth outlook for 4Q19. They also did a good job during the call at providing more details on future growth projects, for example the role they can play in helping fleet managers reduce downtime and become more efficient though the use of truck-to-trailer link and a telematics ecosystem (a $6B market). This is a place where ST can become a key data insight partner.
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