Sensata Earnings: We Lower Fair Value Estimate to $69 on Weaker Near Term, but Continue to See Long-Term Value

We trim our fair value estimate for shares of narrow-moat Sensata Technologies ST to $69, from $71, to reflect a weaker fourth-quarter guide and expectations for a soft 2024. Sensata’s fourth-quarter guidance missed our expectations due to a higher impact management is baking in from ongoing worker strikes at US automakers. We also anticipate soft industrial markets to persist into 2024, along with moderating automotive growth overall. Still, we see shares as deeply undervalued. We continue to think the market is missing Sensata’s long-term opportunity in electrification, its design win momentum to this end, and its resulting growth potential over the next five years.

Third-quarter sales dropped 2% year over year and 6% sequentially to $1.00 billion. Declines were led by Sensata’s industrial and heavy vehicle markets, which each dropped in the double-digits sequentially. Customers in these markets have slowed orders in response to higher interest rates and softer consumer demand, in our view, and we expect these headwinds to be short term. Brightly, automotive sales rose 5% year over year and 4% sequentially, showing Sensata’s ability to outperform underlying production with its exposure to electric vehicles. Non-GAAP operating margin compressed modestly, both sequentially and year over year, to 19.1% on lower volume.

Management’ fourth-quarter outlook came in lower than the initial guidance it provided at Sensata’s investor day just a month prior. Management now expects a sales midpoint of $975 million, down from $1 billion, resulting from the impact of strikes at U.S. automakers that have limited production. We anticipate this impact to limit itself to fourth-quarter results.