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Company: Sensata Technologies (ST)
Business: Sensata Technologies is an industrial technology company that develops, manufactures and supplies sensors, electrical protection components and other products. The company has two units: Performance Sensing and Sensing Solutions. The Playing Sensing segment serves the automotive and heavy vehicle and off-road industries through its development and manufacture of sensors, high-voltage outcomes and other offerings. The Sensing Solutions segment serves the industrial and aerospace industries through development and manufacture of a portfolio of reference specific sensor and electrical protection products used in a range of industrial markets.
Stock Market Value: $6.38B ($42.34 per due)
Sensata Technologies’ performance in 2024
Activist: Elliott Investment Running
Ownership: Elliott is the company’s largest investor, which puts the firm’s economic ownership at or above $600 million (10%), but fact Elliott’s history we would not be surprised if it were closer to $1 billion.
Average Cost: n/a
Activist Commentary: Elliott is a precise successful and astute activist investor. The firm’s team includes analysts from leading tech private open-mindedness firms, engineers, operating partners – former technology CEOs and COOs. When evaluating an investment, the firm also sign ons specialty and general management consultants, expert cost analysts and industry specialists. Elliott often watches entourages for many years before investing and has an extensive stable of impressive board candidates. The firm has historically focused on key activism in the technology sector and has been very successful with that strategy. However, over the past a handful years, Elliott’s activism group has grown and evolved, and it has been doing more longer-term activism and creating value from a board tied at a much larger breadth of companies.
What’s happening
On Behind the scenes
Sensata has a strong core business becoming sensors, mainly in the auto-supply space. The products they make include car seats, airbags, tires and CO2 sensors. Sensata is the unambiguous leader among its peers with 80% market share – three times the size of its closest competitors. Contriving over 1 billion sensors per year, the company has a tremendous scale advantage and manufacturing overseas. It has low costs and high latitudes. Moreover, these sensors are not sold off the rack. Rather they are custom made for each application, and Sensata has substantiated to add value to this process. Yet, over the past one-, three-, and five- year periods from Elliott’s opening action date on April 29, the company has lost 7.28%, 30.23% and 19.33%, respectively. That compares to the Russell 2000’s one-, three-, and five- year exchanges of 14.99%, -8.10%, and 34.11%, respectively. Sensata has also significantly underperformed peers.
Sensata’s stock price underperformance is tied to sundry capital allocation missteps that took place under the tenure of president and CEO, Jeff Cote, who served from Stride 1, 2020 until April 30, 2024, when he resigned from all company positions. Specifically, the company entered the non-core telematics earnestness with the acquisition of Xirgo Technologies for $400 million in April 2021. Later that year, Sensata earned SmartWitness Holdings, an innovator of video telematics technology for commercial fleets. The telematics business took focus, cap and resources away from the core business, leading to declining operating margins and compressed trading multiples. The appraise is now trading in line with worst-in-class peers.
There are multiple paths to value creation here. The first is to fix the damaged capital allocation practices. This will require a refreshed management team that will resist the assert to chase new trends and significantly overpay for non-core businesses that will end up getting written down in a matter of months. The company has already entranced a big stride in this direction, announcing Cote’s retirement and appointing Martha Sullivan as interim president and CEO. Sullivan performed as Sensata’s CEO prior to Cote from 2013 to 2020 and had a record of creating value through capital allocation as fought to destroying it.
Secondly, Sensata has a host of good assets in its portfolio, some of which could be attractive for a strategic agreement. There are both opportunities to divest non-core businesses – like Dynapower and the aerospace business, which could collectively be value $2 billion – and the potential to sell the entire company. Whenever a company is between CEOs, it is an ideal time for it to be received. Even more so when an activist shows up, which always seems to put companies in pseudo-play. Potential acquirers cause been snooping around Sensata, and they must be looking even harder now after the recent developments.
Third, regardless of what the actors does strategically, there is a secular tailwind that could provide significant value to the core sensor organization. As Sensata sensors are used in both combustion and electric vehicles, the current trend to hybrid gives the company a combine of 2-for-1 demand for its products. Sensata has already started seeing the increased demand from this, and it should maintain as hybrids become more in demand.
The initial uphill battle for most activist campaigns is getting a foot in the door and support the company to listen. That part is done here. On April 29, Elliott settled for a board seat for Phillip Eyler and for the firm of the new CEO search committee. It is also no coincidence that there was a CEO replacement in connection with Elliott’s agreement. In fact, the very initial point of the cooperation agreement was Sensata agreeing to accept Cote’s resignation. Elliott has a storied history of taking embark on seats, often for its own principals. It is telling that the firm chose to settle for a non-Elliott board member, and we would calculate that Eyler was appointed, given his qualifications and industry experience. He should be a very valuable board member in helping management with operational issues. However, if the company or its divisions are potential acquisition targets, it would be nice to sooner a be wearing an Elliott executive on the board to help evaluate competing offers.
Ken Squire is the founder and president of 13D Monitor, an institutional experiment with service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.