Stock CTS Corporation: Engineering Solutions (NYSE: CTS)
CTS Company (CTS) is a name I haven’t covered in the past, but its positioning and a recent deal seem enough to justify a thesis on the company. I found a pretty interesting company that has concentration issues, but has seen solid growth, trades at a modest valuation, and has real balance sheet integrity. All of this makes for a pretty compelling setup.
CTS is a designer and maker of custom-designed solutions that sense, connect and move, enabling a smart and transparent world. The company generates approximately half a billion in sales annually, with just over half in transportation markets, a quarter in industrial markets, with the remainder coming from medical, aerospace, defence, telecommunications and computers.
The activity is focused on the United States where just over half of the revenues are generated, supplemented by a 30% exposure to Asia and a lesser contribution of revenues from Europe.
Providing products and solutions such as materials formulation, sensing elements and assemblies, as well as sensors and transducers, CTS seems well positioned. These products allow the company to capitalize on long-term growth trends related to sustainability, automation and innovation in healthcare, as the company’s goal is to diversify transport market operations, reducing this dependency to less than 50% in the years to come. years.
A little history
CTS has a long track record as it was already a public company in the 1980s. Except for a short-term boom around the dot-com bubble, stocks are trading largely flat. Just a $10 share in 2012, the company has been trading in the $20-$40 range since 2017, currently trading a bit towards the top of the range at $34 per share.
The company has seen solid growth in recent years, with sales growing from $423 million in 2017 to $513 million in 2021 (after a tough 2020). EBITDA margins were fairly stable and increased from 19% to 21% over the same period. Showing adjusted earnings close to $1.50 per share in 2018/2019, earnings dipped in 2020 amid the pandemic, but rebounded sharply to $1.93 per share in 2021.
On the 2021 results
After a tougher 2020, CTS saw a strong recovery in 2021 as full-year revenue Pink 21% to $513 million as strong operating leverage led to a much larger improvement in operating profit to $76 million. The company actually recorded a large GAAP loss related to its pension plans, as a charge of $97 million was taken on the termination of its US pension plan.
Adjusted earnings were posted at $1.93 per share as the adjustments look fairly fair and the business is very profitable operationally, with adjusted EBITDA of $108 million resulting in attractive margins in the 20s. .
The company has a very strong balance sheet, which contains $142 million in cash and cash equivalents, as well as an additional $49 million in pension assets. This is offset by only $80 million in debt, lease liabilities and pension liabilities. This reveals that there is really over $100 million in net cash, which is very significant because there are only 32 million shares outstanding, which translates to net cash of over $3 $ per share.
The 32 million shares value the company’s equity at $1.09 billion, a figure that falls just under $1 billion given net cash. This amounts to a multiple of around 2 times sales, less than 10 times the multiple of EBITDA, as the shares trade at around 15 to 16 times earnings, after removing net cash.
The company further released a comforting outlook for 2022 with estimated sales in the $525-550 million range, while adjusted earnings are expected to improve to $2.00-2.25 per share, indicating growth. reasonable on both parameters this year, at least that’s the goal because events in Ukraine offer a real wild card here.
A bolted agreement
Immediately following the release of 2021 results, CTS announced a supplemental agreement. The company has reached a nearly $25 million deal to to acquire TEWA temperature sensors based in Poland.
This deal is a bolt-on deal, equal to 2-3% of own valuation here, but thankfully no financial details or company contributions have been announced. Nevertheless, it should contribute to driving growth, while the integrity of the balance sheet is of course more than preserved.
One last thought
Truth be told, CTS seems pretty cheap as management is slowly transforming the company for the better. Moreover, a very strong balance sheet is fully capable of supporting follow-on transactions, such as the purchase of TEWA. This all sounds pretty compelling at 15x forward earnings here, but I have some concerns about the earnings projections for 2022.
After all, the company is strongly tied to transport markets and is now entering a potential recession, while energy and fuel prices are rising very sharply, which portends disappointment in the results of 2022.
Nonetheless, the long-term appeal is evident here, as I wouldn’t rule out M&A interest from other parties as well, given the company’s strong positioning in combination with favorable valuation. Therefore, a small allocation here seems reasonable, as I look forward to company coverage with larger intervals in the future.