Sensata Earnings: Headwinds Persist, but We Retain Our Long-Term Bullishness

We are maintaining our $71 fair value estimate for narrow-moat Sensata Technologies ST after the company reported first-quarter results slightly exceeding our revenue expectations. Despite continued headwinds from supply chain constraints, foreign exchange impacts, and inflation, we are pleased with Sensata’s ability to remain on track to meet its long-term targets. Our long-term thesis maintains that Sensata will be a beneficiary from secular growth in electric vehicles through its market outperformance in electrification. Positively, the firm reaffirmed its goal of $2 billion in electrification revenue by 2026 as battery electric vehicle content expands, an estimate that we view as achievable and paramount to Sensata’s success. Shares sold off after the release, falling more than the broader market, in our view due in part to tempered short-term profitability commentary that doesn’t worry us. We see shares as attractive.

First-quarter revenue grew 2% year over year, reaching $998 million, as Sensata continues to see healthy fundamentals but battle headwinds from foreign currency. Automotive revenue, which is the firm’s primary driver, increased 12% year over year, benefitting from market growth and higher pricing. Meanwhile, the firm’s industrial end markets came in weaker than management expectations, which tempered strong automotive results.

Non-GAAP operating margin increased 60 basis points year over year to 19.3%. The firm continues to focus on achieving its target level of adjusted operating margin of 21% exiting 2023, which will be primarily dependent on higher volumes. However, management tempered expectations for a full-year figure close to 21%, which we had viewed as optimistic. Still, we see improving volumes and profitability through the year and healthy levels heading into 2024. At the midpoint of guidance, Sensata implies a 19.4% non-GAAP operating margin in the second quarter, which would represent sequential expansion of 10 basis points.