On Tuesday, Evercore ISI adjusted its financial outlook for Sensata Technologies (NYSE:ST), reducing the price target to $50 from the previous $60, while maintaining an Outperform rating on the stock. The revision follows the recent sale of Sensata's Insights business to an affiliate of Balmoral Funds, now known as Xirgo Technologies, which was finalized on September 30th. The transaction, valued at around $165 million in cash, also resulted in a non-cash pre-tax charge of approximately $95 million.
The sale has prompted Sensata's management to revise the December quarter revenue guidance downwards to between $920 million and $950 million, a decrease from the earlier projection of $970 million to $1 billion. The deal was completed at a valuation below one times revenue, contrary to expectations of one to two times revenue. Despite this, the transaction is seen as aligning with Sensata's strategy of shedding non-core assets and reducing debt to concentrate on its main business.
The updated financial model for Sensata now estimates December quarter total revenues at $931 million, down from the previously expected $995 million, with earnings per share (EPS) projected at $0.80, a decrease from the earlier forecast of $0.90. The firm believes that Sensata has considerable operational upside potential that could be realized either through organic growth or strategic initiatives.
Evercore ISI notes that while Sensata is currently navigating through a challenging automotive sector, the company's commitment to consistent performance and fiscal discipline is expected to lead to an expansion of its valuation multiples in the coming years. The firm anticipates that Sensata could achieve a 20% EBIT margin by fiscal year 2025, provided it continues to improve margins incrementally by 20 to 30 basis points and sees free cash flow (FCF) conversion increase to over 80% from the current rate of approximately 50%. This outlook also assumes a shift in Sensata's business mix away from the automotive sector and towards industries such as industrial.
In other recent news, Sensata Technologies has seen a flurry of financial activity, with multiple firms revising their price targets. BofA Securities maintains a neutral stance, anticipating Sensata's third-quarter revenue and earnings per share to align with expectations, projected at approximately $985 million and $0.85 respectively. The company's fourth-quarter guidance, previously estimated to remain flat, is now expected to be at the lower end of the updated guidance range, which spans from $920 million to $950 million.
TD Cowen maintains a buy rating with a $50.00 price target, while Jefferies and Baird have adjusted their price targets, lowering them to $40 and $42 respectively. Sensata's Q2 revenue was reported at $1.036 billion with an adjusted operating income of $196.7 million. The company's Q3 2024 guidance fell slightly short of Wall Street forecasts, with anticipated earnings ranging between $0.82 and $0.88 per share.
Sensata also plans to exit approximately $200 million worth of low-margin products to improve profitability, aligning with the company's focus on the growing electrification sector. Additionally, Sensata raised $500 million through a bond offering and plans to retire $700 million in bonds due in October 2025. As part of the leadership news, the company is in the process of searching for a new CEO.
InvestingPro Insights
To complement Evercore ISI's analysis, recent data from InvestingPro offers additional insights into Sensata Technologies' financial position. The company's market capitalization stands at $5.51 billion, with a price-to-earnings (P/E) ratio of 17.55 based on the last twelve months as of Q2 2024. This P/E ratio is significantly more favorable than the negative P/E of -127.37 reported earlier, suggesting an improvement in earnings performance.
Sensata's revenue for the last twelve months as of Q2 2024 was $4.04 billion, with a gross profit margin of 30.4%. The company's operating income margin for the same period was 13.56%, which aligns with Evercore ISI's projection of potential margin expansion.
InvestingPro Tips highlight that Sensata Technologies has a high return on invested capital, indicating efficient use of its resources. Additionally, analysts have recently revised their earnings upwards for the company, which could support the positive outlook despite the recent sale of its Insights business.
For investors seeking a deeper understanding of Sensata's financial health and future prospects, InvestingPro offers 16 additional tips that could provide valuable insights for investment decisions.
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