Sensor manufacturer Sensata Technology (NYSE:ST) announced better-than-expected results in Q4 FY2023, with revenue down 2.2% year on year to $992.5 million. On the other hand, the company expects next quarter's revenue to be around $990 million, slightly below analysts' estimates. It made a non-GAAP profit of $0.81 per share, down from its profit of $0.96 per share in the same quarter last year.
Sensata Technologies (ST) Q4 FY2023 Highlights:
- Revenue: $992.5 million vs analyst estimates of $978.9 million (1.4% beat)
- EPS (non-GAAP): $0.81 vs analyst expectations of $0.86 (5.3% miss)
- Revenue Guidance for Q1 2024 is $990 million at the midpoint, below analyst estimates of $999 million
- Free Cash Flow of $56.71 million, down 34.9% from the previous quarter
- Inventory Days Outstanding: 92 in line with previous quarter
- Gross Margin (GAAP): 29.2%, down from 35.1% in the same quarter last year
- Market Capitalization: $5.47 billion
Originally a temperature sensor control maker and a subsidiary of Texas Instruments for 60 years, 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).
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.
Sensata Technologies's revenue growth over the last three years has been unremarkable, averaging 11.8% annually. This quarter, its revenue declined from $1.01 billion in the same quarter last year to $992.5 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).
Even though Sensata Technologies surpassed analysts' revenue estimates, this was a slow quarter for the company as its revenue dropped 2.2% year on year. This could mean that the current downcycle is deepening.
Sensata Technologies may be headed for an upturn. Although the company is guiding for a year-on-year revenue decline of 0.8% next quarter, analysts are expecting revenue to grow 1.9% over the next 12 months.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity 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 DIO came in at 92, which is 9 days above its five-year average, suggesting that the company's inventory levels are higher than what we've seen in the past.
In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. Sensata Technologies's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 29.2% in Q4, down 5.8 percentage points year on year.
Sensata Technologies's gross margins have been trending down over the last 12 months, averaging 31.6%. This weakness isn't great as Sensata Technologies's margins are already far below other semiconductor companies and suggest shrinking pricing power and loose cost controls.
Sensata Technologies reported an operating margin of 18.5% in Q4, down 1.6 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.
Sensata Technologies's operating margins have been stable over the last year, averaging 19.1%. Furthermore, the company's margins are a bit below industry average. Sensata Technologies could be spending more efficiently on procurement, manufacturing, R&D, marketing, and general business expenses.
Earnings, Cash & Competitive Moat
Analysts covering Sensata Technologies expect earnings per share to grow 9.8% over the next 12 months, although estimates will likely change after earnings.
Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. Sensata Technologies's free cash flow came in at $56.71 million in Q4, down 69.4% year on year.
As you can see above, Sensata Technologies produced free cash flow of just $272.1 million in the last year, resulting in a measly 6.7% free cash flow margin. Sensata Technologies might need to improve its free cash flow conversion if it wants to stay competitive.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company's revenue growth was profitable. But was it capital-efficient? If two companies had equal growth, we’d prefer the one with lower reinvestment requirements.
Enter ROIC, a metric showing how much operating profit a company generates relative to its invested capital (debt and equity). ROIC not only gauges the ability to grow profits but also a management team's ability to allocate limited resources.
Sensata Technologies's five-year average ROIC was 9.1%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+. Its returns suggest it historically did a subpar job investing in profitable growth initiatives.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last two years, Sensata Technologies's ROIC has averaged a 4.4 percentage point increase each year. This is a good sign, and if Sensata Technologies's returns keep rising, there's a chance it could evolve into an investable business.
Key Takeaways from Sensata Technologies's Q4 Results
It was encouraging to see Sensata Technologies narrowly top analysts' revenue expectations this quarter. That stood out as a positive in these results. On the other hand, its EPS missed analysts' expectations and its gross margin shrunk. Overall, this was a mixed quarter for Sensata Technologies. The company is down 1.1% on the results and currently trades at $35.75 per share.
Is Now The Time?
When considering an investment in Sensata Technologies, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
We cheer for everyone who's making the lives of others easier through technology, but in the case of Sensata Technologies, we'll be cheering from the sidelines. Its revenue growth has been a little slower over the last three years, but at least growth is expected to increase in the short term. On top of that, its gross margin indicate some combination of pricing pressures or rising production costs, and its relatively low ROIC suggests it has struggled to grow profits historically.
Sensata Technologies's price-to-earnings ratio based on the next 12 months is 9.2x. 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.
To get the best start with StockStory check out our most recent Stock picks, and then sign up to our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds of the data being released, and especially for the companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.