Calculated Diversification And Innovation Drive Robust Growth Across Diverse Markets

Key Takeaways

• CTS's diversification strategy and strategic acquisitions, like SyQwest, are expected to boost revenue and earnings through market and product expansion.
  
• Growth in defense, medical, and transportation sectors is anticipated to positively impact revenue with increased content and new products.
  
• Continued transportation market challenges and softer sales guidance suggest potential revenue growth difficulties, exacerbated by execution risks from the SyQwest acquisition and foreign exchange reliance.

Catalysts

Manufactures and sells sensors, actuators, and connectivity components in North America, Europe, and Asia.

• The continued execution of CTS's diversification strategy has resulted in 52% of overall revenue coming from diversified markets, and further progress is expected next year. This expansion is likely to impact revenue positively.
  
• The SyQwest acquisition is expected to accelerate growth in the defense sector by moving CTS up the value chain and enabling the expansion into new products, which should help grow revenue and potentially improve net margins as well.
  
• In the medical market, CTS's products for critical ultrasound diagnosis and minimally invasive procedures indicate a growth area, with future volumes in portable ultrasound diagnostics expected to enhance revenue and possibly earnings.
  
• CTS's efforts in the transportation sector, particularly with interest in the eBrake product and other sensor applications, are anticipated to increase content per vehicle, which should boost revenue over time.
  
• Strategic acquisitions, like SyQwest, alongside ongoing product and market expansion initiatives, are expected to drive growth in high-quality end markets, supporting an increase in earnings in line with CTS's diversification strategy.

CTS Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CTS's revenue will grow by 5.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.7% today to 14.8% in 3 years time.
• Analysts expect earnings to reach $90.1 million (and earnings per share of $3.02) by about October 2027, up from $59.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.4x on those 2027 earnings, down from 25.2x today. This future PE is lower than the current PE for the US Electronic industry at 23.6x.
• Analysts expect the number of shares outstanding to decline by 0.54% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.12%, as per the Simply Wall St company report.

CTS Future Earnings Per Share Growth

Risks

• The transportation market faced significant softness, with a 17% decline in sales year-over-year and continued market challenges in China, potentially impacting future revenue from this sector.
  
• An overall reduction in the company's sales guidance for 2024 from $525 million to $540 million suggests lower expected revenue growth than previously forecasted, reflecting potential challenges in achieving higher earnings.
  
• The anticipated softness in commercial vehicle-related revenue throughout the rest of 2024 could negatively impact overall revenues and profit margins if not mitigated by other segments.
  
• While defense and certain diversified markets show positive sales growth, the transportation market's continued challenges and the potential impacts of changing market demand trends may weigh on overall revenue prospects.
  
• The integration of the SyQwest acquisition and reliance on favorable foreign exchange effects present execution risks that could affect profit margins and overall cost management if not managed effectively.

Valuation

• The analysts have a consensus price target of $49.0 for CTS based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $610.0 million, earnings will come to $90.1 million, and it would be trading on a PE ratio of 19.4x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $49.73, the analyst's price target of $49.0 is 1.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.