Sensata Technologies: Bad Sense On This Sensor Play

Sensata Technologies (ST) is a name that has surfaced on my radar at various points in time. Little over two years ago I believed that this secular growth play was trading at an appealing valuation, that is in September 2018. That optimism was based on the fact that Sensata could be a more differentiated supplier compared to pure-play automotive suppliers thanks to exposure to other industries and focus on sensors, yet despite that promise, the company has not lived up to its expectations.

Fast forwarding little over two years in time, shares are flat, which might look good in relation to the developments, with of course COVID-19 dominating 2020. At the same time, it marks a dramatic underperformance vs. the wider market, as I am getting impatient with the continued disappointments displayed upon.

A Look Back in Time

Two years ago I called Sensata Technologies an undercovered stock which has been making some progress on an organic basis while some interesting deals were made as well, including the 2014 purchase of Schrader Group in a deal valued at little over half a billion. This was followed by the purchase of GIGAVAC in 2018, albeit that this transaction was a bit smaller.

Ahead of the purchase of GIGAVAC, the company had steadily grown the sales to $3.3 billion in 2017, which fell actually short compared to its long-term ambitions. The company reported adjusted earnings of $3.19 per share, and while GAAP earnings ran at just 75% of that level, the discrepancy was largely related to amortization expenses, which I can adjust for. With net debt around $2.5 billion, leverage ratios were a bit on the high side around 3 times.

Nonetheless, I believed that the 15-16 times trailing earnings multiple looked reasonable with shares trading around the $50 mark at the time. This was certainly the case as the company guided for solid sales and earnings growth in 2018, although I realised that automotive related supplier never fetch big multiples. At the same time, I believed that this was not your typical supplier within the sector.

For starters, the company has much more exposure to other industries, not just related to automotive. Sensata has exposure to commercial jets, boats, agriculture vehicles, homes and HVAC systems as well. Furthermore, the sensor intensive solutions and products are focused on long-term trends such as clean emissions, efficient products, electrification of products, autonomy and IoT. This should provide some long-term tailwinds, although hardly observed in the real numbers as automotive has seen some tough times.

What Happened?

With exception to a big move lower amidst the outbreak of COVID-19, shares have long been trending around the $50 mark, and over the past 24 moths, or actually a bit longer, have not moved at all over this period of time.

Early in 2019, the annual results for 2018 were released with revenues of $3.5 billion being up 6% on an organic basis. The company reported adjusted earnings of $3.65 per share with GAAP earnings only lagging a few pennies compared to that. Furthermore, the company guided for modest growth in 2019 with adjusted earnings set to rise towards the $4 per share mark.

Shares continued to grade around the $50 mark throughout 2019 even as the results for the year were quite disappointing, while the wider automotive sector has seen some headwinds. As it turned out, revenues for 2019 were actually down 2% while the company guiding for growth. Adjusted earnings per share fell a similar 2% to $3.56 per share, missing the initial guidance by about half a dollar, as GAAP earnings only came in at half that number with some charges appear.

Net debt was stable around the $2.5 billion level, quite substantial with my estimate of EBITDA trending around $900 million. Furthermore, the company guided (remember that this was 11 February) that both revenues and adjusted earnings were set to be flat compared to 2019, not very impressive of course.

Of course, this guidance was ahead of the real outbreak of COVID-19 as the crisis hit the company hard. First-quarter sales fell 11% as COVID-19 only impacted the results late in the quarter. Second-quarter sales, when the crisis was in full swing, revealed a 35% decline in sales, as sales declines in the third quarter were far less pronounced at just 7%. While net debt has gradually been reduced to $2.36 billion, and the company has regained profitability after a tough second quarter, leverage ratios remain elevated.

Some Thoughts

While I have held a small long position since 2018, I must say that I am far from impressed with the performance; that is the understatement of the year. The company is not as good as I believed, or was led to be believed, as I have been disappointed many times in a row now.

Truth be told is that leverage, revenues and earnings (excluding the impact of COVID-19) have not moved at all on a net-net basis over the past two years and change, quite disappointing.

With shares dead flat without any dividends received in the meantime, there is not much to like on that side as well, as the truth is that the low interest rate environment is probably the reason why the shares are still trading at $50 here.

Here and now I am holding a small position on the back of the relative value argument, although I no longer have conviction as I did in 2018, making me a happy seller on any rips from here.

Disclosure: I am/we are long ST. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.