Key Takeaways:
Current Price: $44.5 Price Target: $53
Position Size: 2.08% 1-year Performance: -5.6%
- Sales show a bounce back from last quarter up 37% quarter/quarter, thanks to auto and truck markets recovery
- Margins contracted due to weaker volume, reversal of temporary cost cutting and mix shift (lower sales from higher margins aerospace and industrial clients)
- New business wins are positive, and above last year’s level – with a majority coming from new megatrends opportunities in electrification and smart & connected solutions
- CEO quotes:
- “we continued to be confident that we will sustain our market outgrowth for 2020 in the range of 600 basis points to 800 basis points for our heavy vehicle off-road and 400 basis points to 600 basis points for automotive, consistent with our long-term goals and supported by our higher levels of new business wins”
- “we have closed electrification new business wins with some of the largest and the most innovative automotive OEMs around the globe. In our core markets, the average content on battery electric vehicle now materially exceeds that of the average internal combustion vehicle”
- Content in electric cars battery is $50, vs. $38-$40 for internal combustion
- 4Q20 sales guidance is above estimates but margins below
- Agreement reached to install and operate their “smart & connected” hardware and data services with a heavy duty vehicle fleet manager
- Move towards data analytics/subscription basis service is advancing: first commercial agreement achieved, with multiple trials moving forward toward commercialization (a $6B market)
- If Biden wins, it would be a positive for the company as Biden signaled his desire to increase fuel standards (something that does not happen overnight but long-term positive impact)
Sensata released 3Q20 revenue that beat expectations (organic sales down 7.5% vs. down ~34% last quarter). Regarding its end-markets, the company believes the auto industry has consumed in Q3 the inventory built earlier in the year during the shutdown of the economy. In its HVOR segment, the company is starting an attractive recurring sales type of business with a large fleet manager (some potential leads they have manage over 10,000 vehicles). SO here is an example of where Sensata is moving parts of its business: this particular first client opted for a full subscription option, where ST builds the equipment and work with the client to install it. The client then pays for the equipment and data analysis on a subscription basis for the next 6-7 years. Other clients can opt to pay the equipment up-front and only pay for the data services. This looks pretty attractive, and will allow more regular revenue stream for the company (they typically have a more cyclical business with industrial/auto end-markets).
We think the stock was weak today due to the margins comments. While adjusted operating margin was above estimates at 19.6%, it is still a 390bps decrease y/y. Also, the want to continue investing in the megatrends (electrification etc) in the coming year. O offset some of that, the company is starting a new cost reduction program that should save $60-$65M next year. At the end of the quarter, ST had $1.6B of cash on hand. The management team is putting a priority in growing its megatrend business (through R&D and M&A).
We still believe in the long-term thesis of this company, and are not changing our view/price target or position size at this time.
Illustrations of the megatrends opportunities:
Segments review:
- Automotive organic sales -7.9%: ST outgrew the market by 290bps thanks to safety related launches, electrification and emissions growth
- HVOR organic revenue -7.8% y/y: outgrew the market by 860bps thanks to China VI emissions regulations
- Industrial & other: organic revenue -2.2%: strength coming from ventilators and factory automation growth
- Aerospace organic growth -24.4% – new defense products launching
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
category: earnings
$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