Sensata Earnings: Long-Term Electrification Growth Thesis Intact Despite Near-Term Market Choppiness

We maintain our $71 fair value estimate for Sensata Technologies’ ST shares after second-quarter results showed the firm continuing to work its way through bumpy end market conditions. Sensata’s sales exceeded our expectations, but guidance for the third quarter missed our model. The firm continues to deal with headwinds like inventory destocking at customers and foreign exchange headwinds as well as soft industrial demand. End markets look choppier for 2023 than previously expected, but in the long term we see the firm as a major beneficiary of electrification. Its design activity over the past three years will pave the way for strong growth in 2024 and beyond, in our view. We continue to see shares as cheap for a narrow-moat company with appealing growth and profitability prospects. Shares dropped 8% on weak guidance, but we think the market is not focusing enough on long-term opportunity.

Second-quarter sales rose 4% year over year and 6% sequentially to $1.06 billion. Automotive growth of 4% year over year drove results as a majority of sales but was softer than we’d expected with some weakness in China. Heavy vehicle sales continue to outperform automotive sales growth, reflecting both healthy demand and a strong position for Sensata. Industrial markets like heating and air conditioning remain weak after pandemic-era highs.

Non-GAAP operating margin of 19.4% rose 40 basis points year over year and 10 basis points sequentially. We view 19% margin as a decent level for Sensata, and it was helped by pricing actions over the past year. We have confidence in the firm achieving its long-term 21% target with volume growth over the next couple years.

Third-quarter guidance implies sequential moderation in sales, led by industrial demand weakness and continued soft autos demand out of China. We now expect modest growth in 2023 with bumpy end markets but believe a healthy electric vehicle market can drive a return to high-single-digit growth in 2024.