ST - Sensata Technologies: Ambitious Goals At Investor Day

2023-10-17 15:48:59 ET

Summary

• Sensata recently detailed its strategic outlook till 2026, emphasizing its role in the evolving automotive electrification.
• The company has set aggressive revenue and margin targets, aiming for a 7%-9% revenue CAGR by 2026, focusing on electrification.
• Electrification and cost management are primary drivers for Sensata, targeting electrification to contribute 40% of total revenue by 2026.
• Sensata projects impressive EPS growth, aiming for a CAGR of 14% to 19% and an EPS between $5.50 and $6.30 by 2026.

Sensata Technologies (ST) recently hosted its much-anticipated Investor Day presentation at the end of September, offering a comprehensive glimpse into its strategic vision up to 2026. Sensata emerges as a proactive stakeholder, keen on capitalizing on these pivotal changes as the automotive world accelerates toward electrification and innovation. The event illuminated the company's roadmap, emphasizing aggressive revenue targets, the crucial role of electrification, disciplined capital allocation, and the prospects of significant EPS growth. Investors and industry-watchers alike were provided with a clear picture of Sensata's aspirations amid the shifting industry landscape and the challenges and opportunities ahead.

Given Sensata's strategic vision for 2026, I recommend a hold on Sensata, awaiting the realization of its ambitious targets amidst the evolving automotive landscape. Sensata must navigate industry trends, macroeconomic indicators, and internal company objectives to meet the goals laid out below.

Aggressive Revenue and Margin Targets

Sensata has set ambitious targets, envisioning robust growth by 2026. The cornerstone of their strategy is capitalizing on the electrification wave in the automotive industry. Management expects to grow revenue at a CAGR of 7%-9% by 2026, translating to revenues of $5.0B - $5.3B. Furthermore, the company is anticipating a remarkable improvement in operating margins, targeting a range of 21%-23% by 2026, up from 19.3% in 2023E, underpinned by an enhanced focus on electrification.

These aggressive forecasts are modeled on the assumption that new business wins will propel future organic revenue growth, such as the electrification segment revenue growing at 42% CAGR by 2026. Since 2015, Sensata has grown its revenues by a CAGR of around 4% from $2.9B to $4.0B. Sensata's agility in adapting to market fluctuations and steadfastness in realizing its aggressive revenue aspirations will be crucial to its success trajectory in navigating the future.

Propelled by Electrification and Cost Management

Electrification is a pivotal driver in Sensata's strategic roadmap, poised to bolster revenue and margin objectives. The company foresees electrification as a substantial contributor, estimating it to account for around 40% of the total revenue by 2026. An emphasis on optimized cost management, underscored by restructuring and operational leverage, also plays a critical role in Sensata's forward trajectory, aiming to offset the challenges posed by the evolving automotive landscape.

The blueprint of expectations, marked by a pronounced optimism, envisages a transformation that would position Sensata as a powerful contender in the evolving automotive landscape. However, while the targets are ambitious, they also beckon a sense of cautious analysis and discernment from investors, ensuring that the enthusiasm is well-balanced with a keen awareness of the volatile market dynamics and execution imperatives.

Capital Allocation Strategy

Sensata has laid out a clear capital deployment strategy, emphasizing lowering its leverage and ensuring timely debt repayment. The investor day presentation indicates a strategic decline in net leverage from 3.4x in 2022 to less than 2x by 2026.

Key capital deployment priorities for the company include maintaining a competitive dividend, repaying upcoming debt maturities using available cash, and making opportunistic share repurchases. Notably, the company doesn't foresee the need for significant acquisitions to succeed in electrification at the current juncture. This approach reflects Sensata's commitment to financial prudence and stability, focusing on strengthening its core while minimizing financial risk.

From a balance sheet perspective, the company has $3.8 billion of total debt and $2.9 billion of net debt after subtracting cash and short-term investments. The company is highly leveraged, with a total debt-to-equity ratio of 118%, and has never been under 100%, albeit this is the lowest the ratio has been in the company's history. Additionally, management authorized the share repurchase program of $500 million, which is a good use for their $800 million in cash on hand, especially since there are no plans for near-term acquisitions.

Sensata seems committed to reinforcing its capital allocation priorities, given the improvements in its balance sheet over time. However, the company has never achieved net leverage under 2x, with its lowest reaching 2.8x in 2018, so I think its goal to reduce net leverage under 2x appears lofty.

Double-Digit EPS Growth

Sensata Technologies is charting a promising trajectory for its growth, as depicted by its projected EPS figures. By 2026, the company aims to elevate its EPS from $5.50 to $6.30. Firstly, improving operating margins are evident, with an expected operating profit ranging from $1.75 to $2.50, a significant rise from the 2023 estimate of $3.72. The company's financial strategy also showcases a prudent approach to interest, expecting a moderate impact of $0.45 to $0.50 and a tax impact ranging from $0.35 to $0.50. These strategic moves are poised to result in a CAGR of 14% to 19%, driving the company towards its ambitious EPS goal by 2026.

Valuation

Sensata's current valuation presents a compelling narrative about the company's potential. Sensata shares are trading at a price-to-earnings (P/E) ratio of 10.1x based on the 2023 estimated EPS of $3.72. Looking ahead to 2026, Sensata's EPS is projected to increase to $5.90, which implies a P/E multiple of 6.3x at the current share price of $37.44. This suggests that if Sensata achieves its targeted EPS by 2026, the shares will be significantly undervalued at today's prices.

We arrive at this implied equity value by using today's P/E multiple of 10.1x to the forecasted 2026 net income (derived from multiplying the projected EPS of $5.9 by the shares outstanding). Essentially, it provides a glimpse of the company's total value in 2026 if it trades at the same multiple as it does today, given the expected net income.

Whether Sensata will meet its 2026 EPS projection depends on industry trends, company-specific developments, and broader economic indicators. Given the ambitious growth trajectory highlighted in their roadmap and the accelerating trend towards automotive electrification, it's plausible. Yet, like any projection, uncertainties persist. If Sensata effectively executes its strategic plans and achieves its EPS targets, investors can gain a sizable upside from the current share price.

Final Thoughts

Sensata has laid out an ambitious roadmap for the coming years. Their forecasts are indeed lofty, but history has shown the challenge of achieving such projections consistently. That being said, if Sensata can harness the trends in automotive electrification and achieve its set targets, the potential for share appreciation is immense. The projected valuation metrics offer a tempting prospect for investors. However, as with any ambitious projection, there is inherent risk, and it is essential to balance enthusiasm with a realistic assessment of market conditions and execution challenges. Observing their upcoming Q3 2023 earnings on October 31st will be interesting, which may provide more insights into their journey towards these ambitious goals.

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