CTS (CTS)

Electronic components manufacturer CTS Corporation (NYSE:CTS) missed Wall Street’s revenue expectations in Q1 CY2025, with sales flat year on year at $125.8 million. On the other hand, the company’s outlook for the full year was close to analysts’ estimates with revenue guided to $535 million at the midpoint. Its non-GAAP profit of $0.44 per share was 10.2% 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 can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.

With $515.8 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.

As you can see below, CTS grew its sales at a sluggish 2.6% compounded annual growth rate over the last five years. This shows it failed to generate demand in any major way and is a rough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within business services, a half-decade historical view may miss recent innovations or disruptive industry trends. CTS’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 6.1% annually.

This quarter, CTS’s $125.8 million of revenue was flat year on year, falling short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 5.5% 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 catalyze better top-line performance.

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D.

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 14.7%.

Analyzing the trend in its profitability, CTS’s operating margin rose by 3 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q1, CTS generated an operating profit margin of 12.9%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

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 a remarkable 11.4% compounded annual growth rate over the last five years, higher than its 2.6% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into CTS’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, CTS’s operating margin was flat this quarter but expanded by 3 percentage points over the last five years. On top of that, its share count shrank by 7.5%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

In Q1, CTS reported EPS at $0.44, down from $0.47 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects CTS’s full-year EPS of $2.14 to grow 1.4%.

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 15.2% over the last five years.

Taking a step back, we can see that CTS’s margin dropped by 1.2 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

CTS’s free cash flow clocked in at $11 million in Q1, equivalent to a 8.7% margin. The company’s cash profitability regressed as it was 2.6 percentage points lower than in the same quarter last year, suggesting its historical struggles have dragged on.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared 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.

We were impressed by how significantly CTS blew past analysts’ full-year EPS guidance expectations this quarter. On the other hand, its revenue, EPS, and EBITDA fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock remained flat at $39.89 immediately following the results.

Updated: July 10, 2025 at 11:22 PM EDT

When considering an investment in CTS, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

We see the value of companies helping their customers, but in the case of CTS, we’re out. To begin with, its revenue growth was uninspiring over the last five years. And while its 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. On top of that, its projected EPS for the next year is lacking.

CTS’s P/E ratio based on the next 12 months is 19.7x. This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $43 on the company (compared to the current share price of $42.47).