Sensata Technologies has gotten torched over the last six months - since July 2024, its stock price has dropped 21.9% to $29.08 per share. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Sensata Technologies, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Even with the cheaper entry price, we don't have much confidence in Sensata Technologies. Here are three reasons why ST doesn't excite us and a stock we'd rather own.
Why Do We Think Sensata Technologies Will Underperform?
Originally a temperature sensor control maker and a subsidiary of Texas Instruments for 60 years, Sensata Technology Holdings (NYSE: ST) is a leading supplier of analog sensors used in industrial and transportation applications, best known for its dominant position in the tire pressure monitoring systems in cars.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance signals its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Sensata Technologies’s sales grew at a sluggish 3.1% compounded annual growth rate over the last five years. This fell short of our benchmark for the semiconductor sector. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
2. Projected Revenue Growth Shows Limited Upside
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Sensata Technologies’s revenue to stall, close to its flat sales for the past two years. This projection is underwhelming and implies its newer products and services will not catalyze better top-line performance yet.
3. Operating Margin Falling
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.
Looking at the trend in its profitability, Sensata Technologies’s operating margin decreased by 13.3 percentage points over the last five years. The company’s performance was poor no matter how you look at it. It shows operating expenses were rising and it couldn’t pass those costs onto its customers. Its operating margin for the trailing 12 months was negative 3.1%.
Final Judgment
We see the value of companies furthering technological innovation, but in the case of Sensata Technologies, we’re out. Following the recent decline, the stock trades at 7.9× forward price-to-earnings (or $29.08 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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