Value Line recently initiated coverage of Sensata Technologies (ST) in its flagship product, The Value Line Investment Survey. The company produces and sells a wide array of sensors and controls for aircraft and automotive systems, as well as for electric motors. Based in Aimelo, The Netherlands, Sensata operates manufacturing facilities in North America (U.S. headquarters are located in Attleboro, MA), Asia, Eastern Europe, and elsewhere. The company was formed in 2006 when private equity firm Bain Capital bought the Sensors and Controls division of Texas Instruments (TXN) for $3 billion. After restructuring it as an independent corporation, the company was rebranded under the Sensata name and publicly listed in March, 2010. It employs 11,300 workers across the globe.
Sensata operates in two main segments: Sensors and Controls. The former contributed 72% of sales to the company’s 2012 top line, and grew roughly 6% over the previous year’s level. This group’s pressure, force, and other sensors are used in automobile subsystems and industrial products like ventilation and air-conditioning. The Controls group has performed less admirably and has exhibited a 5.5% top line drawback since 2010. Its share of the company’s total business has also waned in that period, from roughly 37% of two years ago down to a shade over 28% in the past year. We believe that once airlines begin to update their fleets more aggressively (discussed below), the share of business between the segments will eventually normalize to previous, healthier levels. What’s more, as the government continues to strive to create a more consolidated, technologically-lethal version of the military, the demand for Sensata’s control systems will improve further.
Since its initial public offering, Sensata has consistently grown the yearly top line by maximizing its geographic flexibility. For instance, while European operations (29% of 2012 sales) have struggled amidst reduced demand for automobile components, Sensata relied more heavily on the emerging markets in Asia (34%) and the Americas (37%) to grow results. We believe the recession in Western Europe will slowly subside and North American demand will continue to improve, which should lend themselves to a bright long-term picture for the company. At its current level though, Sensata’s shares look overvalued, as they trade at nearly 27 times our 2013 share-net estimate, considerably higher than the Value Line median of 17.1. Interested investors may want to wait for a pullback in price before making a play on the neutrally ranked stock.
The nature of sensor and control development is characterized by an ever-evolving technologic focus. The fact that automotive and aircraft companies are always looking to stay a leg up on competition by offering the best-in-class control and sensor systems will help to drive demand for Sensata’s array of products. What’s more, many of the carriers in the airline industry are looking to upgrade their aging fleets. Domestic and foreign airlines alike will be purchasing new planes and enhancing nearly obsolete operating systems, leaving plenty of upside for the Controls segment’s sales in the future.
Subscribers interested in owning a piece of this Dutch sensor and control maker are advised to consult Value Line’s quarterly reports for Sensata Technologies, as well as any supplemental reports and relevant articles as important news items arise.
At the time this article was written, the author did not have positions in any of the companies mentioned.