Sensata Technologies (ST) Q1 FY2022 Highlights:
- Revenue: $975.7 million vs analyst estimates of $960.6 million (1.57% beat)
- EPS (non-GAAP): $0.78 vs analyst estimates of $0.76 (2.43% beat)
- Revenue guidance for Q2 2022 is $1.01 billion at the midpoint, below analyst estimates of $1.05 billion
- The company reconfirmed revenue guidance for the full year, at $4.2 billion at the midpoint
- Free cash flow of $11.6 million, down 90% from previous quarter
- Inventory Days Outstanding: 89, up from 89 previous quarter
- Gross Margin (GAAP): 32.6%, in line with same quarter last year
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.
Sensata’s peers and competitors include Analog Devices (NASDAQ:ADI), Texas Instruments (NASDAQ:TXN), Skyworks (NASDAQ:SWKS), NXP Semiconductors NV (NASDAQ:NXPI) and Monolithic Power Systems (NASDAQ:MPWR).Analog Semiconductors
Longer manufacturing duration allows analog chip makers to generate greater efficiencies, leading to structurally higher gross margins than their fabless digital peers. The downside of vertical integration is that cyclicality can be more pronounced for analog chipmakers, as capacity utilization upsides work in reverse during down periods.
Sales Growth
Sensata Technologies's revenue growth over the last three years has been unimpressive, averaging 5.75% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $942.5 million to $975.7 million. 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).

While Sensata Technologies beat analysts' revenue estimates, this was a very slow quarter with just 3.52% revenue growth. This marks 6 straight quarters of revenue growth, implying we are mid-cycle for Sensata Technologies, as a typical upcycle tends to last 8-10 quarters.
Sensata Technologies believes the slow growth is set to continue, and is guiding for revenue to grow 1.74% YoY next quarter, and Wall St analysts are estimating growth 11.5% over the next twelve months.
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.

This quarter, Sensata Technologies’s inventory days came in at 89, 9 days above the five year average, suggesting that inventory levels are staying higher than what we used to see in the past.
Pricing Power
Sensata Technologies's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 32.6% in Q1, up 0.1 percentage points year on year.

Sensata Technologies' gross margins have been trending up over the past year, averaging 33.8%. This is a welcome development, as Sensata Technologies's margins are slightly below the group average, potentially pointing to improved demand and pricing.
Profitability
Sensata Technologies reported an operating margin of 18.7% in Q1, down 2.3 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.

Operating margins have been trending up over the last year, averaging 20.5%. Sensata Technologies's margins remain above average, driven by its operating model's well managed cost structure.
Earnings, Cash & Competitive Moat
Analysts covering the company are expecting earnings per share to grow 21.6% over the next twelve months, although estimates are likely to change post earnings.
Earnings are important, but we believe cash is king as you cannot pay bills with accounting profits. Sensata Technologies's free cash flow came in at $11.6 million in Q1, down 84.9% year on year.

Sensata Technologies produced free cash flow of $344 million in the last year, which is 8.92% of revenue. It's good to see positive free cash flow, since that allows it to strengthen its balance street, but we wouldn't want to see its free cash flow yield drop much lower.
Sensata Technologies has an average return on invested capital (ROIC) of 11.1%, over the last 5 years. That's not bad, and suggests the business can grow profits, but it isn't particularly impressive compared to other semiconductor companies.
Key Takeaways from Sensata Technologies's Q1 Results
With a market capitalization of $7.65 billion Sensata Technologies is among smaller companies, but its more than $1.6 billion in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.
It was good to see Sensata Technologies outperform Wall St’s earnings expectations this quarter. And we were also happy to see it topped analysts’ revenue expectations, even if just narrowly. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and the revenue growth was quite weak. Overall, this quarter's results were not the best we've seen from Sensata Technologies. The company is flat on the results and currently trades at $48.73 per share.
Is Now The Time?
When considering Sensata Technologies, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in the case of Sensata Technologies we will be cheering from the sidelines. Its revenue growth has been very weak, and analysts expect growth rates to deteriorate from there. And while its sturdy operating margins suggest disciplined operating expense controls, unfortunately gross margins are weaker than its semiconductor peers we look at.
Sensata Technologies's price to earnings ratio based on the next twelve months is 11.6x. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.
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