Tuesday, Goldman Sachs adjusted its stance on Sensata Technologies (NYSE:ST) stock, downgrading from Buy to Neutral and reducing the price target to $36.00 from the previous $44.00.
The firm cited expectations of slower revenue growth in Sensata's North American automotive business, particularly concerning electric vehicles (EVs), as a reason for the downgrade. The analyst pointed out that weaker near-term EV sales and delays in EV launches by some traditional manufacturers are contributing factors.
Sensata Technologies, known for having greater content in battery electric vehicles (BEVs) compared to internal combustion engine (ICE) vehicles in North America, is facing a challenging market environment.
The company's BEV content is approximately 1.5 times that of an ICE vehicle in North America, in contrast to 0.5 times in Europe and 1.25 times in China. Despite this, Sensata's business in China is believed to be more aligned with multinational corporations rather than domestic OEMs like BYD (SZ:002594).
While Sensata has secured strong electrification-related bookings in recent years, and the potential for its plug-in hybrid vehicle content is considered attractive, Goldman Sachs anticipates modest downside to Street estimates. The firm suggests that Sensata's stock may not outperform until there is a clearer acceleration in the company's fundamentals.
Reflecting on Sensata's performance since being added to Goldman Sachs' Buy list on April 12, 2020, the stock has seen a modest increase of 5%. This compares to an 84% rise at the median for the firm's broader coverage and an 86% increase for the S&P 500 over the same period. The analyst attributes Sensata's relative underperformance to the margin headwinds experienced by the company.
InvestingPro Insights
In light of the recent downgrade by Goldman Sachs, current real-time data from InvestingPro provides a nuanced view of Sensata Technologies' financial health and market performance. The company's adjusted market capitalization stands at $5.4 billion, with a forward-looking P/E ratio based on the last twelve months as of Q4 2023 at a more favorable 14.93, indicating a potential normalization in valuation metrics. Additionally, Sensata has maintained a steady gross profit margin of 31.49%, showcasing its ability to retain earnings as revenue converts to gross profit.
While the revenue growth shows a modest increase of 0.62% in the last twelve months as of Q4 2023, the quarterly comparison reveals a slight dip of -2.19%, which could raise concerns about near-term revenue prospects and may align with Goldman Sachs' assessment of the company's challenges in the North American EV market. Nonetheless, Sensata's dividend yield stands at 1.34%, backed by a dividend growth of 9.09%, which could be a sign of the company's commitment to returning value to shareholders.
Investors considering Sensata Technologies may also find the InvestingPro Tips particularly insightful. One tip highlights the importance of monitoring upcoming earnings reports, with the next one scheduled for April 23, 2024. This event could provide critical insights into the company's financial trajectory and operational efficiency. Another tip underscores the relevance of Sensata's fair value, with InvestingPro's analysis placing it at $44.86, suggesting a potential undervaluation at the current price of $35.44.
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