Key Takeaways:
Current Price: $54.5 Price Target: $61
Position Size: 1.47% 1-year Performance: +30%
Sensata released its 2Q21 earnings this morning. Sales grew 63% organically thanks to end-market recovery and their own market outgrowth, while operating income grew 179% due to top line growth and productivity. The China VI regulations has led to a nice content per truck increase. The management team remains cautious in its auto production growth, expecting a rebound still from 2020 but lowering it to +5% globally for the year, while IHS predicts a 9% growth rate. On the positive side, ST now sees better recovery in Heavy Vehicles and Industrials end markets. The chip shortage situation is impacting the auto and heavy vehicles production, but Sensata’s industrial portfolio came in stronger than expected. The current cash balance is $1.9B, leaving plenty of room for additional M&A. Net leverage ratio is 2.7X, decreasing from 2.9X last quarter. The stock is trading down slightly today due to the reduction in auto production outlook for the rest of 2021. We think the company has plenty of opportunities going forward thanks to its push in the electrification theme and see the near-term auto production downgrade as a minimal risk to the investment thesis.
Sales growth by segment:
- Automotive organic sales +75%: ST outgrew the market by 990bps, excluding channel restocking. This is driven by powertrain and emissions, safety, electrification applications despite chip shortage. The company expects restocking to be a further tailwind going forward.
- HVOR organic revenue +96% y/y: outgrew the market by 2,850bps, excluding channel restocking. This is driven by the China VI emissions regulations, operator controls, RADRA safety and tire pressure monitoring applications
- Industrial & other revenue +29%. Growth was driven by heating, ventilation and air conditioning, new electrification launches and restocking.
- Aerospace sales +20.6%, as OEM production improved and air traffic recovery (aftermarket business)
2021 guidance was raised to account for the good 2Q results and is now:
- Organic sales +19-21% from +16-21%
- Adjusted EBIT $782M-818M from $755M-805M
- EPS $3.42-$3.62 from $3.20-$3.50
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