CTS (CTS)

Electronic components manufacturer CTS Corporation (NYSE:CTS) reported Q3 CY2025 results beating Wall Street’s revenue expectations, with sales up 8% year on year to $143 million. The company’s full-year revenue guidance of $540 million at the midpoint came in 1.8% above analysts’ estimates. Its non-GAAP profit of $0.60 per share was 1.6% below analysts’ consensus estimates.

Company Overview

With roots dating back to 1896 and a global manufacturing footprint, CTS (NYSE:CTS) designs and manufactures sensors, connectivity components, and actuators for aerospace, defense, industrial, medical, and transportation markets.

The sector could see higher demand as the prevalence of advanced electronics increases in industries such as automotive, healthcare, aerospace, and computing. The high-performance components and contract manufacturing expertise required for autonomous vehicles and cloud computing datacenters, for instance, will benefit companies in the space. However, headwinds include geopolitical risks, particularly U.S.-China trade tensions that could disrupt component sourcing and production as the Trump administration takes an increasingly antagonizing stance on foreign relations. Additionally, stringent environmental regulations on e-waste and emissions could force the industry to pivot in potentially costly ways.

CTS competes with other electronic component manufacturers such as TE Connectivity (NYSE:TEL), Sensata Technologies (NYSE:ST), Amphenol Corporation (NYSE:APH), and Vishay Intertechnology (NYSE:VSH), along with divisions of larger industrial conglomerates.

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years.

With $531.5 million in revenue over the past 12 months, CTS is a small player in the business services space, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and numerous distribution channels. On the bright side, it can grow faster because it has more room to expand.

As you can see below, CTS’s sales grew at a decent 5% compounded annual growth rate over the last five years. This shows its offerings generated slightly more demand than the average business services company, a useful starting point for our analysis.

Long-term growth is the most important, but within business services, a half-decade historical view may miss new innovations or demand cycles. CTS’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 3.3% over the last two years.

This quarter, CTS reported year-on-year revenue growth of 8%, and its $143 million of revenue exceeded Wall Street’s estimates by 4.8%.

Looking ahead, sell-side analysts expect revenue to grow 5.7% over the next 12 months, an improvement versus the last two years. This projection is above the sector average and implies its newer products and services will spur better top-line performance.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

CTS has been an efficient company over the last five years. It was one of the more profitable businesses in the business services sector, boasting an average operating margin of 15.2%.

Analyzing the trend in its profitability, CTS’s operating margin rose by 26 percentage points over the last five years, as its sales growth gave it immense operating leverage.

This quarter, CTS generated an operating margin profit margin of 14.6%, down 2.1 percentage points year on year. This contraction shows it was less efficient because its expenses grew faster than its revenue.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

CTS’s EPS grew at an astounding 15.1% compounded annual growth rate over the last five years, higher than its 5% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into CTS’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, CTS’s operating margin declined this quarter but expanded by 26 percentage points over the last five years. Its share count also shrank by 8.9%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For CTS, its two-year annual EPS declines of 3.5% mark a reversal from its (seemingly) healthy five-year trend. We hope CTS can return to earnings growth in the future.

In Q3, CTS reported adjusted EPS of $0.60, down from $0.63 in the same quarter last year. This print slightly missed analysts’ estimates, but we care more about long-term adjusted EPS growth than short-term movements. Over the next 12 months, Wall Street expects CTS’s full-year EPS of $2.14 to grow 12.1%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

CTS has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the business services sector, averaging 15.4% over the last five years.

CTS’s free cash flow clocked in at $24.2 million in Q3, equivalent to a 16.9% margin. The company’s cash profitability regressed as it was 6.9 percentage points lower than in the same quarter last year, but it’s still above its five-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

CTS’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 15.3%, slightly better than typical business services business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, CTS’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

CTS reported $110.3 million of cash and $132.6 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $121.4 million of EBITDA over the last 12 months, we view CTS’s 0.2× net-debt-to-EBITDA ratio as safe. We also see its $1.46 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing CTS beat analysts’ revenue expectations this quarter. We were also glad its full-year revenue guidance exceeded Wall Street’s estimates. On the other hand, its EPS missed and its full-year EPS guidance fell slightly short of Wall Street’s estimates. Overall, this print was mixed. The stock remained flat at $42.45 immediately following the results.

Updated: December 3, 2025 at 9:11 PM EST

Before making an investment decision, investors should account for CTS’s business fundamentals and valuation in addition to what happened in the latest quarter.

CTS isn’t a terrible business, but it doesn’t pass our bar. Although its revenue growth was decent over the last five years and Wall Street believes it will continue to grow, its diminishing returns show management's prior bets haven't worked out. And while the company’s powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits, the downside is its subscale operations give it fewer distribution channels than its larger rivals.

CTS’s P/E ratio based on the next 12 months is 18.5x. Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $47 on the company (compared to the current share price of $45.13).