Sensata Technologies (NYSE:ST) Exceeds Q2 Expectations But Full Year Guidance Underwhelms

Kayode Omotosho /
2022/07/26 6:12 am EDT

Sensor manufacturer Sensata Technology (NYSE:ST) reported Q2 FY2022 results that beat analyst expectations, with revenue up 2.8% year on year to $1.02 billion. However, guidance for the next quarter was less impressive, coming in at $1 billion at the midpoint, being 5.85% below analyst estimates. Sensata Technologies made a GAAP profit of $34.8 million, down on its profit of $112.9 million, in the same quarter last year.

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Sensata Technologies (ST) Q2 FY2022 Highlights:

  • Revenue: $1.02 billion vs analyst estimates of $1 billion (1.51% beat)
  • EPS (non-GAAP): $0.83 vs analyst expectations of $0.83 (in line)
  • Revenue guidance for Q3 2022 is $1 billion at the midpoint, below analyst estimates of $1.06 billion
  • The company dropped revenue guidance for the full year, from $4.2 billion to $4.01 billion at the midpoint, a 4.52% decrease
  • Free cash flow of $56.1 million, up from $11.6 million in previous quarter
  • Inventory Days Outstanding: 87, down from 89 previous quarter
  • Gross Margin (GAAP): 32.7%, down from 33.6% same quarter last year

"Sensata delivered record revenue in the second quarter, with results in line with guidance despite significant market, supply chain, and foreign currency headwinds. Sensata’s organic revenue growth outpaced underlying markets by 650 basis points and we delivered growth from acquisitions of 280 basis points, offsetting end market declines compared to the prior-year quarter,” said Jeff Cote, CEO and President of Sensata.

Originally a temperature sensor control maker and part of Texas Instruments for 60 years, before eventually being spun out, Sensata Technology Holdings (NYSE: ST) is a leading supplier of analog sensors used in industrial and transportation applications, best known for its dominant position in the tire pressure monitoring systems in cars.

Demand for analog chips is generally linked to the overall level of economic growth, as analog chips serve as the building blocks of most electronic goods and equipment. The biggest secular growth drivers currently are the adoption of electric vehicles, 5G networks and Internet of Things connectivity, and demand for chips that reduce power consumption. Unlike digital chip designers, analog chip makers tend to produce the majority of their own chips, as analog chip production does not require expensive leading edge nodes. Less dependent on major secular growth drivers, analog product cycles are much longer, often 5-7 years.

Sales Growth

Sensata Technologies's revenue growth over the last three years has been unimpressive, averaging 6.26% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $992.6 million to $1.02 billion. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Sensata Technologies Total Revenue

While Sensata Technologies beat analysts' revenue estimates, this was a very slow quarter with just 2.8% revenue growth. This marks 7 straight quarters of revenue growth, which means the current upcycle has had a good run, as a typical upcycle tends to be 8-10 quarters.

However, Sensata Technologies believes the growth is set to even accelerate, and is guiding for revenue to grow 5.15% YoY next quarter, and Wall St analysts are estimating growth 11.3% over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.

Sensata Technologies Inventory Days Outstanding

This quarter, Sensata Technologies’s inventory days came in at 87, 7 days above the five year average, suggesting that despite the recent decrease the inventory levels are still higher than what we used to see in the past.

Key Takeaways from Sensata Technologies's Q2 Results

With a market capitalization of $6.89 billion Sensata Technologies is among smaller companies, but its more than $1.55 billion in cash and positive free cash flow over the last twelve months give us confidence that Sensata Technologies has the resources it needs to pursue a high growth business strategy.

Sensata Technologies topped analysts’ revenue expectations this quarter, even if just narrowly. And we were also glad to see the inventory levels go down. On the other hand, it was unfortunate to see that Sensata Technologies's revenue guidance for the full year missed analyst's expectations and the revenue guidance for the full year was downgraded. Overall, it seems to us that this was a complicated quarter for Sensata Technologies. The company currently trades at $43.96 per share.

Sensata Technologies may have had a tough quarter, but does that actually create an opportunity to invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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The author has no position in any of the stocks mentioned.