With roots dating back to 1916, this former division of Texas Instruments (TXN) was LBO'd by Bain Capital in 2006 for $3 billion. Sensata Technologies (ST) is a leading global manufacturer of customized sensors (60% of sales) and controls (40%) that are used to improve safety and energy efficiency in mission critical applications, from braking systems in cars to heating, ventilation and air conditioning in commercial and residential markets.
The company plans to offer 31.6 million shares, including 5.3 million from insiders, at a price range of $18-$20. Morgan Stanley (MS), Barclays (BCS), Goldman Sachs (GS), BofA Merrill Lynch (BAC) and J.P. Morgan (JPM) are acting as joint bookrunners on the deal. If successful, Sensata will be the largest IPO of 2010, easily eclipsing the $315 million IPO from insurer Symetra (SYA) in late January.
Solid fundamental story with organic growth drivers
Sensata's sensors translate physical phenomena into electronic signals that can be used by computers, while its controls are embedded within systems to protect against excessive heat or current. Products are customized for clients in various end markets, including automotive, commercial and industrial, and typically have long lead times (3-5 years) and are sold under multi-year contracts (3+ years). This affords the company with strong barriers to entry and solid visibility, and Sensata has longstanding relationships with key industrial OEMs and suppliers, such as Ford (F), GM, Honda (HMC), Volkswagen and Whirlpool (WHR). Margins and free cash flow have improved thanks to cost cutting efforts, and the company expects to drive double digit organic growth as a result of a continued rebound in auto/industrial sectors, increased demand for safety and efficiency in its verticals as well as its strategic presence in emerging markets.
Despite using the majority of proceeds to de-lever its balance sheet, Sensata will remain highly leveraged following the IPO with $1.7 billion in net debt, over 5x operating cash flow. Further, although growth rebounded in 4Q09 (+26% y/y), net revenue declined 20% overall in 2009 as the financial crisis caused order volume from customers to fall significantly, particularly within the battered auto sector (50% of sales).
Valuation at a premium
Industrial stocks have outperformed year-to-date on hopes of a cyclical rebound and Sensata's growth will likely outpace the majority of its peers; however, the deal is being priced at a premium to other electrical component providers on both sales and cash flow. Given the pricing headwinds faced by recent prospective IPOs and the firm's significant leverage, we would not be surprised to see investors push for a lower price despite Sensata's solid fundamental story.