Sensata Technologies (NASDAQ:ST) Posts Better-Than-Expected Sales In Q3 But Quarterly Guidance Underwhelms

Analog sensors manufacturer Sensata Technology (NYSE:ST) announced better-than-expected results in the Q3 FY2021 quarter, with revenue up 20.6% year on year to $951 million. On the other hand, guidance for the next quarter missed analyst expectations with revenues guided to $910 million, or 3.17% below analyst estimates. Sensata Technologies made a GAAP profit of $84.9 million, improving on its profit of $76.7 million, in the 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. Read More The semiconductor industry is broadly divided into analog and digital semiconductors. Digital chips are what most people think of as the brains of almost every electronic device. Their primary purpose is to either store (memory chips) or process (CPUs/GPUs) data. By comparison, analog chips regulate real world signals, such as temperature, speed, sound, or electrical current, converting them into a stream of digital data that can be processed by digital semiconductors. Analog semiconductors are also used to manage power in any electronic device; they convert, store and distribute the electrical energy that comes from a battery or wall plug. Analog chips are found everywhere from household appliances like refrigerators or washing machines, to smartphones, cars and factory production lines.

Sales Growth

Sensata Technologies's revenue growth over the last three years has been slow, averaging 5.12% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $788.3 million to $951 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).

This was a decent quarter for Sensata Technologies as revenues grew 20.6%, topping analyst estimates by 2.28%. This marks 4 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 growth is set to continue, and is guiding for revenue to still grow next quarter, and Wall St analysts are estimating growth 5.31% over the next twelve months.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as the cyclical nature of semiconductor supply and demand impacts profitability. In a tight supply environment, inventories tend to be low, allowing chipmakers to exert pricing power, which helps increase gross margins. The inverse also applies, as rising inventory levels tend to foreshadow weakening pricing power and declining gross margins.

This quarter, Sensata Technologies’s inventory days came in at 80, 2 days above the five year average, suggesting that inventory has grown to a level slightly above the long term average.

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 33.8% in Q3, up 1.1 percentage points year on year.

Sensata Technologies' gross margins have been trending up over the past year, averaging 33.6%. This is a welcome development, as Sensata Technologies' margins are below the group average, potentially pointing to improved demand and pricing.

Profitability

Sensata Technologies reported an operating margin of 21.1% in Q3, up 1.5 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 21.2%. Sensata Technologies's operating 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 9.18% 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 $88.4 million in Q3, down 11.3% year on year.

With a 14.1% free cash flow margin and $532.4 million in free cash flow over the last twelve months, Sensata Technologies has an ability to convert revenues to free cash flow that is around the average for the semi group, which should provide sufficient liquidity to invest in the business even during downcycles.

Sensata Technologies’s ability to invest its free cash flow back into new products is average for the semiconductor industry, as its 11.7% return on invested capital suggests.

Key Takeaways from Sensata Technologies's Q3 Results

With a market capitalization of $8.97 billion Sensata Technologies is among smaller companies, but its more than $1.95 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.

We were excited to see that earnings and revenue outperformed Wall St’s expectations. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and there was an increase in Sensata Technologies’s inventory levels. Overall, this quarter's results seemed mixed. The company is flat on the results and currently trades at $56.7 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 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 14.7x, suggesting that the market does have lower expectations of the business, relative to the high growth semiconductors stocks. 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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