At the start of the year, I called Sensata Technologies Holding plc (STX) a struggling, but promising sensor business. Despite the promise of a sound positioning, the company has managed to disappoint investors time and time again recently, making arguably a group of investor tired, and no longer interested in the business.
So far this year, the company continues to struggle, as a leadership change and rationalization in the line-up might ignite some appeal going forward. Investors are rightfully still awaiting green shoots before considering a position here.
Been Around
Sensata’s history goes back to the 1930s, when the first motor protector was patented by the business. Texas Instruments bought the business in the 1950s, as Bain Capital was the owner from 2006 onwards, and in 2010 the business became a public company.
The company focuses on production and shipping sensors to its clients. Some 20,000 workers produce over a billion in sensors every year, with about 50,000 individual products being produced from hundreds of manufacturing lines.
A focus on safe and efficient operations, but moreover greater electrification and insights by the marketplace and within many product applications, drive increased usage of sensors in many applications. With the business hit hard by the supply chain disruptions during the pandemic, I first look at 2019, a year in which the company posted $3.5 billion in sales, on which adjusted operating profits of a healthy $800 million were posted. This translated into solid earnings of $3.50 per share.
A $50 stock looked reasonably valued, yet it was a high exposure to the automotive sector and somewhat higher leverage, which made investors cautious to apply a higher valuation multiple to the business.
2020 sales fell to $3.0 billion, for obvious reasons, but revenues rebounded to $3.8 billion in 2021 (aided by a $400 million deal for Xirgo). Following a $580 million purchase of Dynapower, a $4.0 billion revenue number in 2022 felt a touch light.
After posting a 2% increase in first quarter sales for the year 2023, and a 4% increase in the second quarter, it was inventory de-stocking trends which meant that third quarter sales were down 2% on an annual basis. There was no recovery seen in the fourth quarter. This meant that 2023 sales came in flattish, with adjusted earnings reported at $3.65 per share for the year. This was largely equal to 2019 earnings, but moreover, earnings were quite adjusted, as dealmaking meant that net debt was rather steep at around $3 billion.
Even if I put realistic earnings at less than $3 per share (given the aggressive adjustment practices), a low double-digit earnings multiple looked quite reasonable. On the other hand, the business operated with a 3.1 times leverage ratio, which remained on the high side.
With the company underperforming to its positioning, and somewhat related peer Mobileye (MBLY) announcing a considerable profit warning at the start of the year, I was cautious. While the valuation revealed massive opportunities, investors have been disappointed in the past, making that I lacked conviction to get involved.
Stuck
A $34 stock earlier this year trades at similar levels today, after trading in a $32-$42 trading range for most of this year so far. This suggests that no clear direction is chosen, all related to the rather sluggish performance of the business.
In February, the company reported 2023 sales at $4.05 billion, up around half a percent on the year before, although organic growth was reported at 1.5%, offset by adverse currency moves. Adjusted earnings were posted at $3.64 per share, but among others, conveniently exclude for a $2.67 per share restructuring charge, and some other items. In fact, GAAP losses were posted at a few pennies.
For 2024, the company guided for relatively flattish trends. Some weakness was seen in the first half, to be offset by a recovery in the second half of the year.
Given the guidance for weakness in the first half of the year, the company posted a relatively impressive 1% increase in first quarter sales to $1.01 billion, with adjusted earnings down three cents to $0.89 per share. Despite this optimism, the company guided for year-over-year revenue declines in the second quarter, as there was no recovery seen.
In April, it was announced that CEO Jeff Cote was stepping down from his role, which ignite some enthusiasm as shares moved to the forties, as some changes might be in the works.
In July, Sensata posted a 2% fall in second quarter sales to $1.04 billion, with adjusted earnings down four cents to $0.93 per share. Again, the gap with GAAP earnings remains substantial, with GAAP earnings coming in half the number at $0.47 per share, largely due to restructuring efforts, among others.
Net debt remains pretty stable, reported at $2.89 billion, for a 3.2 times leverage ratio based on trailing EBITDA of $902 million. The lack of deleveraging, comes among others, because of the distorted earnings numbers, with some charges really involves cash outlays.
And Now?
With Sensata Technologies Holding plc struggling so far this year, but initially guiding for a recovery in the second half of the year, and the company seeing a turnover at the top helmet, the focus remains on the outlook.
For the third quarter, the company calls for sales between $970 million and a billion. This suggests flattish sales at best, and at minus 3% at worst.
However, this requires some explanatory words, as the company started a program to exit underperforming businesses with $200 million in annual revenues.
This move is expected to hurt sales by thirty million in the third quarter. Adjusted for this, sales are seen between flat and up 3%. An adjusted earnings guidance of $0.85 per share, plus or minus three pennies, would still be down six cents, not being too inspiring, of course.
Given all this, I like the fact that measures are undertaken. However, the cold reality is that Sensata Technologies Holding plc’s growth is not to be found. Earnings remain highly adjusted, leaving the proof of burden with new management.
Read the full article here