Over the past six months, Sensata Technologies has been a great trade, beating the S&P 500 by 8.5%. Its stock price has climbed to $31.56, representing a healthy 13.8% increase. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now the time to buy Sensata Technologies, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think Sensata Technologies Will Underperform?

We’re happy investors have made money, but we don't have much confidence in Sensata Technologies. Here are three reasons why ST doesn't excite us and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Sensata Technologies’s sales grew at a sluggish 2.7% compounded annual growth rate over the last five years. This fell short of our benchmarks. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

2. Revenue Projections Show Stormy Skies Ahead

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 drop by 3.4%, close to its 2.7% annualized growth for the past five years. This projection is underwhelming and suggests its newer products and services will not accelerate its top-line performance yet.

3. Shrinking Operating Margin

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Looking at the trend in its profitability, Sensata Technologies’s operating margin decreased by 10.3 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Sensata Technologies’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was 3.3%.

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. With its shares topping the market in recent months, the stock trades at 9.9× forward P/E (or $31.56 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

Stocks We Would Buy Instead of Sensata Technologies

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