No Surprises In Sensata Technologies's (NYSE:ST) Q3 Sales Numbers But Quarterly Guidance Underwhelms

Sensor manufacturer Sensata Technology (NYSE:ST) fell short of analysts' expectations in Q3 FY2023, with revenue down 1.67% year on year to $1 billion. However, next quarter's revenue guidance of $975 million was less impressive, coming in 3.7% below analysts' estimates. Turning to EPS, Sensata Technologies made a non-GAAP profit of $0.91 per share, improving from its profit of $0.85 per share in the same quarter last year.

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"Sensata's results in the third quarter were in line with our guidance and reflect our commitment to deliver as we transition with our customers to widespread Electrification. Sensata remains on track to achieve its long-term growth goals, including scaling its Electrification business to $2 billion in revenue by 2026,” said Jeff Cote, CEO and President of Sensata.

Originally a temperature sensor control maker and a subsidiary of Texas Instruments for 60 years, Sensata Technology Holdings (NYSE: ST) is a leading supplier of analog sensors used in industrial and transportation applications, best known for its dominant position in the tire pressure monitoring systems in cars.

Analog Semiconductors

Demand for analog chips is generally linked to the overall level of economic growth, as analog chips serve as the building blocks of most electronic goods and equipment. Unlike digital chip designers, analog chip makers tend to produce the majority of their own chips, as analog chip production does not require expensive leading edge nodes. Less dependent on major secular growth drivers, analog product cycles are much longer, often 5-7 years.

Sales Growth

Sensata Technologies's revenue growth over the last three years has been unremarkable, averaging 12.6% annually. This quarter, its revenue declined from $1.02 billion in the same quarter last year to $1 billion. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Sensata Technologies had a difficult quarter as revenue dropped 1.67% year on year, missing analysts' estimates by 0.4%.

Sensata Technologies's revenue inverted from positive to negative growth this quarter, which was unfortunate to see. Looking ahead to the next quarter, the company's management team forecasts a 3.91% year-on-year revenue decline. On the other hand, analysts expect revenue to turn positive over the next 12 months, with average estimates of 2.85% growth.

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Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.

This quarter, Sensata Technologies's DIO came in at 90, which is 7 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.

Key Takeaways from Sensata Technologies's Q3 Results

With a market capitalization of $5.2 billion, Sensata Technologies is among smaller companies, but its $889.7 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

It was encouraging to see Sensata Technologies narrowly top analysts' EPS expectations this quarter. That really stood out as a positive in these results. On the other hand, its revenue guidance for next quarter underwhelmed and its inventory levels increased. Overall, the results could have been better. The company is down 1.61% on the results and currently trades at $33.55 per share.

Sensata Technologies may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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The author has no position in any of the stocks mentioned in this report.