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Sensata Technologies Holding plc (NYSE:ST) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. This difference directly flows down to how much the stock is worth. Operating in the industry, ST is currently valued at US$7.9b. I’ve analysed below, the health and outlook of ST’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.
What is free cash flow?
Sensata Technologies Holding generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
There are two methods I will use to evaluate the quality of Sensata Technologies Holding’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Along with a positive operating cash flow, Sensata Technologies Holding also generates a positive free cash flow. However, the yield of 4.48% is not sufficient to compensate for the level of risk investors are taking on. This is because Sensata Technologies Holding’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is Sensata Technologies Holding's yield sustainable?
Does ST’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 34%, ramping up from its current levels of US$621m to US$830m in two years’ time. Furthermore, breaking down growth into a year on year basis, ST is able to increase its growth rate each year, from 12% next year, to 19% in the following year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Although its positive operating cash flow, and high future growth, is appealing, the low free cash flow yield is unattractive. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. However, cash is only one aspect of investing. Now you know to keep cash flows in mind, I suggest you continue to research Sensata Technologies Holding to get a more holistic view of the company by looking at:
- Valuation: What is ST worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ST is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Sensata Technologies Holding’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.