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A month has gone by since the last earnings report for Sensata (ST). Shares have added about 3.4% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Sensata due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Sensata Q2 Earnings Beat Estimates, Revenues Down Y/Y
Sensata reported tepid second-quarter 2020 financial results, with the top line lagging the Zacks Consensus Estimate and the bottom line surpassing the same. Further, lower segmental revenues due to COVID-19 pandemic, foreign exchange headwinds, logistic challenges and productivity woes affected Sensata’s performance.
On an adjusted basis, quarterly net income was $27.7 million or 18 cents per share compared with $150.4 million or 93 cents per share in the year-ago quarter. The year-over-year decline was primarily caused by lower revenues. However, the bottom line surpassed the consensus estimate by 2 cents.
On a GAAP basis, net loss in the June quarter came in at $42.5 million or a loss of 27 cents per share against net income of $73.4 million or 45 cents per share in the prior-year quarter. The significant year-over-year deterioration was driven by top-line contraction due to lower demand amid the coronavirus-induced turmoil.
Quarterly service revenues amounted to $576.5 million compared with $883.7 million in the year-ago quarter. The 34.8% year-over-year decline was mainly due to foreign exchange fluctuations and end-market contraction due to COVID-19 pandemic. The top line missed the consensus estimate of $584 million. Further, organic revenues declined 33.9% primarily due to the adverse impact of the virus outbreak.
Quarterly Segment Results
Performance Sensing revenues declined 40.2% to $385.2 million from $644.5 million in the year-ago quarter. Accounting 66.8% of total revenues, the decline was primarily due to productivity headwinds and foreign exchange setbacks. Although the segment witnessed HVOR market outgrowth, its operating income declined 65% to $60.8 million from $173.4 million due to declining revenues and lower production levels in manufacturing facilities owing to COVID-19 adversities. However, it was partially offset by short-term cost-reduction initiatives.
Sensing Solutions revenues declined 20% to $191.3 million from $239.2 million in the year-ago quarter. Accounting 33.2% of total revenues, the year-over-year decline was led by adverse impact of the virus outbreak. Also, industrial and aerospace businesses declined 14.6% and 39.4% organically coupled with OEM production delays in a weaker aftermarket. Further, the segment was hurt by forex woes. Its operating income declined 28.2% to $55.8 million from $77.7 million mainly due to lower revenues and reduced productivity. Nevertheless, the acquisition of PRECO Electronics reinforces Sensata’s image and object sensing capabilities.
Total operating expenses were $578.4 million compared with $736.3 million in the prior-year quarter, primarily due to lower cost of revenue and R&D expenses. Adjusted operating income was $75 million, down 63.4% from $205.1 million in the year-ago quarter. The year-over-year downtick was caused by underutilized manufacturing capacity, higher logistics costs, higher costs to safeguard employees, temporary salary reductions and lower revenues due to end-market downfall caused by COVID-19 pandemic. Adjusted gross profit in the quarter declined 47.2% to $165.4 million due to lower revenues. Adjusted EBITDA totaled $104.5 million compared with $231.2 million a year ago.
During the quarter, the company incurred restructuring charges of $26 million associated with workforce reduction initiatives.
Cash Flow & Liquidity
In the first six months of 2020, Sensata generated $170.3 million of net cash from operating activities compared with $252.2 million in the prior-year period. Free cash flow came in at $113.6 million for the first half of the year compared with $170.6 million in the year-ago period.
As of Jun 30, the company had $1,242.9 million in cash and equivalents with $3,220.8 million of net long-term debt. Impressively, the company had $16.1 million under the revolving credit facility. As part of its share repurchase program, Sensata repurchased nearly 0.9 million shares for a total consideration of $35.2 million. However, on Apr 2, 2020, the management took the decision of temporarily suspending its share repurchase program in a bid to improve financial flexibility.
Q3 Guidance Issued & 2020 Outlook Withdrawn
Sensata has issued guidance for third-quarter 2020. The company expects revenues in the range of $675-$705 million. Adjusted earnings per share is estimated in the band of 38-46 cents, while adjusted net income is expected to be in the vicinity of $60-$74 million.
Sensata has undertaken several cost-saving initiatives to enhance its financial flexibility amid the global pandemic. These positive undertakings are expected to result in cost savings of nearly $60-$65 million in 2021. Also, restructuring charges are estimated to be in the range of $43-$49 million.
With global economies gradually stabilizing in Europe, Asia and the United States, Sensata has witnessed a considerable growth in its monthly deliveries and order rates. However, given the macroeconomic uncertainties pertaining to the COVID-19 pandemic, Sensata is maintaining a skeptical approach and has not provided a definite financial outlook for 2020. With a flexible cost structure, Sensata is efficiently managing its working capital and leveraged revolving credit facility to enhance its liquidity position. It has also minimized its capital expenditures to keep a track on its operating expenses. With an optimistic view, Sensata is committed to align its costs with normalized demand levels in order to serve the requirements of customers amid this crisis.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -10.73% due to these changes.
Currently, Sensata has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Sensata has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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