Yesterday Sensata had its Analyst Day and provided 2018 guidance above expectations (the stock reacted positively, up +8%). Additionally, ST’s management gave an upbeat view on the business next three years, and is forecasting a 2-3X acceleration in revenue growth, after three years of below expectations growth.
Following the event, I am updating my price target to $61/share, from $51 prior. This is to reflect the better business trends in the coming three years than previously thought and a re-rating of the stock. A 16-17x P/E is reasonnable, leaving ST’s multiple below peers as the company is still highly levered to the auto business (peaked in the US). I recommend we hold the position.
Below is a summary of the information provided during the event.
• 2018 revenue growth +4% to +7%, organic +3% to +5%
• 2018 Adjusted EPS $3.52-$3.68
• 2018-2020 revenue growth CAGR of 4-6%: 6-7.5% volume growth and -1.5% to -2% pricing in a flat auto production environment
• 2018-2020 adjusted EBIT margin expansion of 250bps
• 2017-2020 EPS CAGR of 10-14%
• 90% of 2020E revenue is secured business, but tied to the auto production mix/level
• 70% of portfolio to grow above its end markets, 30% to grow at the same level
Revenue growth drivers:
1. Auto: MSD revenue growth over 2018-2020 on flat global production.
o Europe: can still drive revenue by 4-5% 2017-2022 even with declining diesel market penetration as ST is growing its gasoline engine content.
o China: content to grow +50% by 2020 thanks to regulation, electrification and modernization
o North America: slowest growth of all geographies
o Electric vehicle is a long-term tailwind for ST, hybrid more impactful today (content per car in mid $30, vs. low $30 for gasoline engines). Opportunities in EV are:
o A/C system requires more sensor than gas engines
o Wireless battery management
2. HVOR: 3% CAGR in global production leading to a HSD-LDD revenue growth CAGR 2018-2020
3. Aerospace & Industrials: both expected to grow low to mid-single-digit revenue growth rate from 2018-20.
Margin expansion:
o Additional $20M in synergies from recent acquisitions to come in next 2 years (this is above the original synergies already reached).
o Operating leverage on volume growth, productivity gains and lower integration costs
Capital allocation:
$1.8B in FCF from 2018-2020, supporting share repurchases and M&A.
o M&A near term towards bolt on acquisitions in clean & efficient/ electrification themes
o Re-domiciliation to the UK eliminates withholding tax on discretionary buybacks and increases management’s flexibility on returning cash to shareholders through share repurchases.