Sensata Technologies has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 12.3% to $42.18 per share while the index has gained 10.8%.
Is there a buying opportunity in Sensata Technologies, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Sensata Technologies Will Underperform?
We’re passing on Sensata Technologies for now. Here are three reasons you should be careful with ST, plus one stock we’d rather own.
1. Long-Term Revenue Growth Flatter Than a Pancake
A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Unfortunately, Sensata Technologies struggled to consistently increase demand as its $3.78 billion of sales for the trailing 12 months was close to its revenue five years ago. This was below our standards and is a sign of poor business quality. 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 Is Slim
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 rise by 4.5%. Although this projection implies its newer products and services will fuel better top-line performance, it is still below the sector average.
3. Low Gross Margin Reveals Weak Structural Profitability
Gross profit margin is a key metric to track because it shows how much money a semiconductor company gets to keep after paying for its raw materials, manufacturing, and other input costs.
Sensata Technologies’s gross margin is one of the worst in the semiconductor industry, signaling it operates in a competitive market and lacks pricing power. As you can see below, it averaged a 29.1% gross margin over the last two years. That means Sensata Technologies paid its suppliers a lot of money ($70.93 for every $100 in revenue) to run its business.
Final Judgment
We cheer for all companies solving complex technology issues, but in the case of Sensata Technologies, we’ll be cheering from the sidelines. That said, the stock currently trades at 10.8× forward P/E (or $42.18 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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