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


Full Report / July 26, 2022
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Sensor manufacturer Sensata Technology (NYSE:ST) reported Q2 FY2022 results beating Wall St's 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.

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

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 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.

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.

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 32.7% in Q2, down 1 percentage points year on year.

Sensata Technologies Gross Margin (GAAP)

Sensata Technologies's gross margins have been stable over the past year, and while at 33.6% they remain below other semiconductor companies, the trend is pointing to a stable pricing environment.

Profitability

Sensata Technologies reported an operating margin of 18.9% in Q2, down 2.1 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.

Sensata Technologies Adjusted Operating Margin

Operating margins have been trending down over the last year, averaging 19.9%. However, Sensata Technologies's margins are still above average for semiconductor companies, driven by an efficient cost structure.

Earnings, Cash & Competitive Moat

Analysts covering the company are expecting earnings per share to grow 24.3% 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 $56.1 million in Q2, down 55.7% year on year.

Sensata Technologies Free Cash Flow

Sensata Technologies produced free cash flow of $273.2 million in the last year, which is 7.03% 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 10.9%, 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 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 put it in a very strong position to invest in growth.

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.

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, but at least that growth rate is expected to increase in the short term. And while its sturdy operating margins suggest disciplined operating expense controls, the downside is that its gross margins are weaker than its semiconductor peers we look at and its cash burn raises the question of whether it can sustainably maintain its growth.

Sensata Technologies's price to earnings ratio based on the next twelve months is 10.5x. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.

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