Sensata Technologies (NYSE:ST) Beats Q4 Sales Targets But Quarterly Guidance Underwhelms

Sensor manufacturer Sensata Technology (NYSE:ST) reported Q4 FY2022 results beating Wall St's expectations, with revenue up 8.56% year on year to $1.01 billion. However, guidance for the next quarter was less impressive, coming in at $975 million at the midpoint, being 2.18% below analyst estimates. Sensata Technologies made a GAAP profit of $113.1 million, improving on its profit of $111.9 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.

Sensatas 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 7.8% annually. And as you can see below, last year has been even less strong, with quarterly revenue growing from $934.5 million to $1.01 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).

While Sensata Technologies beat analysts' revenue estimates, this was a very slow quarter with just 8.56% revenue growth. This marks 9 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.

Sensata Technologies's revenue growth is expected to go negative next quarter, with the company guiding to decline of 0.07% YoY next quarter, but analyst consensus sees growth of 2.01% 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 87, 6 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 33.5% in Q4, down 1.7 percentage points year on year.

Sensata Technologies' gross margins have been trending down over the past year, averaging 32.6%. The weakness isn't great as Sensata Technologies's margins are already below other semiconductor companies as is, reflective of weakening pricing and cost controls.

Profitability

Sensata Technologies reported an operating margin of 20.1% in Q4, down 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.

Operating margins have been trending down over the last year, averaging 19.3%. 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 9.08% 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 $185.2 million in Q4, up 58.3% year on year.

Sensata Technologies has generated $310.5 million in free cash flow over the last twelve months. This is a solid result, which translates to 7.7% of revenue. That's above average for semiconductor companies, and should put Sensata Technologies in a relatively strong position to invest in future growth.

Sensata Technologies has an average return on invested capital (ROIC) of just 9.67%, over the last 5 years. This is fairly low compared to many other semiconductor companies, and suggests the company will have to tie up a lot of capital to achieve significant profit growth..

Key Takeaways from Sensata Technologies's Q4 Results

With a market capitalization of $7.01 billion Sensata Technologies is among smaller companies, but its more than $1.22 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 impressed by how strongly Sensata Technologies outperformed analysts’ earnings expectations this quarter. 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 $46 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 12.3x. 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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