Sensata (ST) Up 11.6% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Sensata (ST). Shares have added about 11.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Sensata due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Sensata Q3 Earnings Top Estimates on Solid Business Growth

Sensata reported impressive third-quarter 2021 results with both the bottom line and top line surpassing their respective Zacks Consensus Estimate. Strategic M&A efforts, strong growth across the automotive, heavy vehicle, and industrial markets despite global supply chain disruptions boosted the company’s quarterly performance. Also, improved demand across end markets backed by strength in the business model and effective adaptation to the evolving market conditions acted as major tailwinds.

Bottom Line

On a GAAP basis, net income in the September quarter came in at $85 million or 53 cents per share compared with $76.7 million or 49 cents per share in the prior-year quarter. The year-over-year improvement was primarily attributable to top-line growth.

On an adjusted basis, quarterly net income was $138.6 million or 87 cents per share compared with $103.6 million or 66 cents per share in the year-ago quarter. The bottom line surpassed the Zacks Consensus Estimate by 2 cents.

Revenues

Quarterly revenues aggregated $951 million compared with $788.3 million in the year-ago quarter. The 20.6% surge in revenues was largely driven by sustained business activities across the Automotive, Industrial, and Aerospace markets. The top line beat the consensus estimate of $936 million.

Despite production declines due to constraints stemming from semiconductor and other component shortages, the company has witnessed significant outgrowth and channel replenishment in the face of evolving supply chain landscape and market conditions. Its flexible business model is a major tailwind that enabled it to deliver such solid results. This demonstrates healthy prospects for Sensata’s core sensing operations, thereby accelerating its growth momentum in the long run.

The company is expanding its electrification ecosystem to facilitate the seamless transition to electric vehicles as it aims to be a leading provider of mission-critical sensor-rich hardware and software solutions. Sensata has a rich portfolio of high-voltage protection and battery management systems. The recent joint venture with Churod Electronics has further expanded its electrical protection capabilities for mass-market applications. Further, pending acquisitions of Spear Power Systems in Clean Energy Solutions and SmartWitness in Sensata Insights boost its long-term growth strategy.

Segment Results

Performance Sensing revenues improved 21.6% year over year to $706.5 million driven by solid organic growth. Accounting for 74.3% of total revenues, the increase was primarily due to solid automotive and heavy vehicle businesses owing to a recovery in customer production. New product launches and improved demand across end markets post the lockdown played major roles as well. Segment operating income jumped to $193.7 million from $151.6 million on higher revenues and savings from restructuring and other cost-reduction initiatives. This was partly offset by elevated costs associated with the industry-wide supply chain shortage.

Sensing Solutions revenues increased to $244.6 million from $207.4 million in the year-ago quarter. Accounting for 25.7% of total revenues, the year-over-year improvement was led by ramped up production of electric vehicles and uptrend in HVAC (heating, ventilation, and air conditioning) business. Segment operating income increased to $75.3 million from $58.2 million, mainly due to higher revenues.

Other Details

Overall organic revenues were up 16.6% year over year led by market growth of 470 basis points (bps) and outgrowth of 1,190 bps. Heavy vehicle off-road business reported organic revenue growth of 58.9%. This represents end market growth of 31.4% driven by various electrical, mechanical operating controls installations in new off-road equipment. The automotive business posted organic revenue growth of 5.2%, benefiting from product launches in powertrain and emissions, and electrification-related applications and systems. The industrial business grew 17.9% organically as global industrial end markets continued to recover and the aerospace business witnessed 8.3% organic growth on improved OEM production in air traffic. Product launches in defense along with enhanced aftermarket conditions drove Sensata’s aerospace business.

Total operating expenses were $789.7 million compared with $661.5 million in the prior-year quarter, primarily due to higher cost of revenues. Adjusted operating income was $201 million, up from $154.8 million in the year-ago quarter. The uptick was mainly caused by higher revenues. However, it was partially offset by higher expenses toward megatrend growth initiatives, higher incentive compensation and elevated costs related to the supply chain woes. Adjusted EBITDA totaled $229.6 million during the quarter, up from $188.4 million.

Cash Flow & Liquidity

In the first nine months of 2021, Sensata generated $393.2 million of net cash from operating activities compared with $293.3 million in the prior-year period. With effective working capital management and cost reductions, free cash flow for the same period came in at $292.8 million compared with $213.4 million a year ago. As of Sep 30, 2021, the company had $1,958.1 million in cash and cash equivalents with $4,214.4 million of net long-term debt.

Q4 Guidance Issued

Sensata has provided guidance for the fourth quarter of 2021. For the quarter, the company expects revenues in the range of $895-$925 million, representing a year-over-year change between 1% decline and 2% growth. Adjusted earnings per share are estimated in the band of 76-82 cents, reflecting a year-over-year decline between 11% and 4%. Adjusted net income is expected to be $121-$131 million, indicating a year-over-year decline between 10% and 3%. Despite Sensata’s impressive quarterly performance, the company expects its financials to get affected by market uncertainty, forex woes, and production constraints stemming from the COVID-19 pandemic. The company intends to resume its balanced capital allocation approach, including both M&A and share repurchases.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -7.37% due to these changes.

VGM Scores

Currently, Sensata has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Sensata has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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