Sensata Technologies Holding (ST - $31.65 )
Thesis
Sensata is a high quality growth company trading at 12.5X 2012 CEPS. Bain Capital bought the business 4/06, and took it public 3/10. Bain owns 65% of the float but is selling 20 million shares in a secondary this
month. The company is valued on CEPS due to high amortization expenses. Rev drivers include increased regulation of: safety, emissions and energy efficiency and consumer demand for electronic products with
more advanced features. Another growth driver is emerging markets. Emerging markets revenue increased at an 18% CAGR from 2006-10 and now represent 19% of total sales. ST targets 10-14% revenue
growth (2-4 points from EM + 8 points from higher content per auto). Strategy Analytics projects the auto sensor market will grow at a 10.3% CAGR from 2009-14 (per 2010 10K). Near term revenue growth
should be faster due to cyclical moves off the bottom in autos and housing and industrial. EPS should grow faster than sales due to deleveraging and modest margin improvement.
Bull Case
a) High quality business with sticky customer base and good earnings visibility:
Ø ST makes Critical Products that are a small part of client cost structures – sensors/controls are critical to OEMs, but represent just 1-3% of total product cost à not likely to be
outsourced to lower cost/lower quality manufacturer. From the 10K. Our products are “highly engineered, critical components in complex systems that are essential to the proper functioning
of the product in which they are integrated. Our products are differentiated by their performance, reliability and level of customization, which are critical factors in customer selection.”
Ø High Switching Costs – products are designed into customers’ product early (ST heavily involved in customers’ R&D process – 200 of ST’s 1000 engineers are embedded w customers), requiring
multi-year investment for (often) government mandated certification/qualification à 2/3 of sales are multi year contracts, and 75% of customers are sole source.
Long term customer relationships ST 10k notes it has “worked with our top 25 customers for an average of 22 years. As a result of the long development lead times and embedded nature of
our products, we collaborate closely with our customers throughout the design and development phase of their products.” 50% of revs from top 20 customers. Company is #1 or #2 player in 75% of
its applications.
b) Double Digit Revenue Growth – ST should grow sales 10-14% independent of the cycle from growth in emerging markets and increased sensor and controls in autos and other products. Auto content
has doubled since 1998 and is anticipated to be up 50% over next five years, developing market penetration is low (~19% of sales in EM, growing 18%), and evolving regulatory standards on emissions,
fuel efficiency and safety should drive growth.
c) Leverage to rebound in SAAR and res construction, both of which are at or near multi-year lows. NA light vehicle sales down 36%, air-con units down 45%, class 8 truck sales down 65%,
construction equipment down 75%.
d) Stock overlooked due to limited float (65% owned by Bain Cap) and tax shields that are obscuring profitability. Both should be resolved as sponsors are selling stock which improves liquidity.
e) Strong FCF. Management targets converting 90% of EBITDA into unlevered FCF which will be used to pay down debt.
Bear Case/Risks
a) Bain stake overhang (6 month lock ended September 2010) – Bain is selling stock again as of 2/11) but during the Bain secondary this Fall, the stock performed well into the offering and even better afterwards.
b) Cycle/economy risk - volumes in underlying auto and industrial markets have to be healthy or stock will not work
c) Relatively high leverage – Net debt to adjusted EBITDA is 3.1x.
Management
· CEO –Thomas Wroe (age 59) – Bio: Mr. Wroe has worked for the company for 37 years and is currently the CEO and Chairman of the Board since 2006 and previously was President of the Sensor & Control business when Sensata was owned by Texas Instruments. Prior to filling his senior role of executive management for the company, Mr. Wroe has worked in several engineering and business management positions.
· Company has made two Bolt on deals over the past three years (Airpax and First Technology), both of which have shown significant margin improvement (from mid-teens EBITDA margins to 30%+
within 2 years). He also closed an acquisition from HON on 2/11, for $140m which will have minimal EPS impact on 2011 but should be nicely accretive in 2012
· Generated cash of $190 mm during worst auto recession on record, in a highly levered structure
Business Description
What the products do:
• Sensors: measurement and feedback to improve operating performance
• Controls: protection from heat and current / fires (circuit breakers, switches, etc)
Sensata is a market leader in the development, manufacture and sale of a wide range of customized, innovative sensors and controls for mission-critical applications. End market exposures include automotive (55%),
appliances and HVAC (14%), industrial 13%, heavy vehicle and off road 7% and other end markets 11%. By region, sales to North America account for 42%, Europe 25% and Asia-Pacific 33%. The company
operates in two segments: Sensors (63%) and Controls (37%). Sensata operated as a part of Texas Instruments from 1959 to 2006. In 2006, it was acquired by Bain Capital for ~$3B and taken public in March 2010.
Sensata’s primary products include pressure sensors, force sensors, position sensors, motor protectors, and thermal and magnetic-hydraulic circuit breakers and switches. They also develop customized and innovative
solutions for specific customer requirements, or applications, across the appliance, automotive- construction, recreational, HVAC, industrial, aerospace, defense, data/telecom, and other end markets. An average U.S
home requires around 30 sensors, switches and other devices that can be provided by company. End markets have varying requirements of sensors and controls per appliance.
The road show together with secondary offering will help get story more widely known