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CTS Corp.: A Cyclical Recovery Play With Secular Upside Potential

Mar. 03, 2021 3:00 AM ETCTS Corporation (CTS)3 Comments


  • CTS appears to be on track for a cyclical recovery amid positive near-term trends in transportation.
  • The cautious guidance numbers also leave room for an upside surprise in the upcoming quarters.
  • Longer term, CTS's components portfolio should allow it to benefit from secular tailwinds, along with accretive M&A.
  • Following the recent correction, shares are very reasonably priced relative to the growth potential.

Buoyed by near-term transportation tailwinds, CTS Corp. (NYSE:CTS) appears poised for upside into the upcoming quarters. Not only was the magnitude of the recent quarterly beat greater than anticipated by consensus, but the conservative fiscal 2021 guidance also leaves room for an upside surprise. With longer-term trends also positive, plenty of M&A-related opportunities ahead, and the multiple de-rating to c. 10x EV/EBITDA (a discount to historical levels), I am positive about the CTS story.

Positive Transportation End-Market Dynamics

CTS's recent end-market performance may have been mixed, but the outperformance of transportation is a key bright spot. To recap, quarterly revenue increased 7% Y/Y, mainly on the back of transportation revenue growth of +12% Y/Y, with non-transportation revenue growth flat Y/Y. The strength in CTS's transportation business serves as a testament to the ongoing post-Covid-19 economic recovery, with its facilities currently running at a peak capacity of 85-100%.

Perhaps more importantly, the company also added four new customers in the recent quarter, including three global OEMs and one North American electric truck OEM. Furthermore, with an implied c. 20% of total new transportation business wins dedicated to fast-growing EV applications, there is plenty of growth potential here. My base-case scenario calls for more near-term strength, in-line with management expectations for global production to improve Y/Y in the US, Europe, and Asia as Covid-19 restrictions are lifted and operating conditions normalize.

Source: CTS Investor Presentation Slides (Feb 2021)

A Recovering North American Auto Cycle Boosts the Near-Term Outlook

The latest North American order data indicates that monthly Class 8 truck orders have been outperforming into year-end, with November orders already reaching pre-pandemic levels. Looking ahead, the recovery looks set to pick up, with current ACT Research forecasts calling for US Class 8 retail sales to rise further in the upcoming year. This seems reasonable to me, considering both

This article was written by

Analyst with a keen interest in the global markets, always sifting through company filings in search of compelling opportunities. Approach is heavily centered on the notion that one needs to be non-consensus right in making investment decisions. A keen follower of value investing legends such as Peter Cundill, Seth Klarman, and more recently, Rupal Bhansali.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (3)

Dipping on no news today. I picked up some more...
Interesting idea. Looks like the market is just waking up to this.
Interesting idea. Many suppliers are trading well above 10x EBITDA.
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