IT Hardware Stocks

CTS Corporation Valuation – August 2018 $CTS

Company Profile (excerpt from Reuters): CTS Corporation, incorporated on February 8, 1929, is a global manufacturer of sensors, electronic components and actuators. The Company designs, manufactures and sells a line of sensors, electronic components and actuators primarily to original equipment manufacturers (OEMs) for the transportation, industrial, medical, information technology, defense and aerospace, and communications markets. The Company operates manufacturing facilities in North America, Asia and Europe. The Company’s products perform specific electronic functions for a given product family and are intended for use in customer assemblies. The Company’s products consist principally of sensors and actuators used in passenger or commercial vehicles; electronic components used in communications infrastructure, information technology and other high-speed applications; switches and potentiometers supplied to multiple markets, and fabricated piezoelectric materials and substrates used primarily in medical, industrial, defense and aerospace, and information technology markets.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of CTS – August 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $1,204,377,645 Fail
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.21 Pass
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 1177.27% Pass
6. Moderate PEmg Ratio PEmg < 20 42.85 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.36 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.21 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.45 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $0.85
MG Growth Estimate 12.26%
MG Value $28.10
Opinion Overvalued
MG Grade C
MG Value based on 3% Growth $12.33
MG Value based on 0% Growth $7.23
Market Implied Growth Rate 17.17%
Current Price $36.45
% of Intrinsic Value 129.73%

CTS Corporation is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, insufficient earnings stability over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $0.47 in 2014 to an estimated $0.85 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 17.17% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into CTS Corporation revealed the company was trading above its Graham Number of $17.81. The company pays a dividend of $0.16 per share, for a yield of 0.4% Its PEmg (price over earnings per share – ModernGraham) was 42.85, which was below the industry average of 53.7, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $1.59.

CTS Corporation receives an average overall rating in the ModernGraham grading system, scoring a C.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) $1.59
Graham Number $17.81
PEmg 42.85
Current Ratio 2.21
PB Ratio 3.36
Current Dividend $0.16
Dividend Yield 0.44%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2018
Total Current Assets $232,060,000
Total Current Liabilities $105,146,000
Long-Term Debt $57,000,000
Total Assets $542,553,000
Intangible Assets $134,614,000
Total Liabilities $178,793,000
Shares Outstanding (Diluted Average) 33,564,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $1.35
Dec2017 $0.43
Dec2016 $1.03
Dec2015 $0.21
Dec2014 $0.78
Dec2013 -$0.12
Dec2012 $0.59
Dec2011 $0.60
Dec2010 $0.63
Dec2009 -$1.01
Dec2008 $0.81
Dec2007 $0.66
Dec2006 $0.63
Dec2005 $0.53
Dec2004 $0.53
Dec2003 $0.36
Dec2002 -$0.54
Dec2001 -$1.61
Dec2000 $2.92
Dec1999 $1.80
Dec1998 $1.28

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $0.85
Dec2017 $0.56
Dec2016 $0.58
Dec2015 $0.37
Dec2014 $0.47
Dec2013 $0.25
Dec2012 $0.40
Dec2011 $0.32
Dec2010 $0.23
Dec2009 $0.13
Dec2008 $0.68
Dec2007 $0.59
Dec2006 $0.47
Dec2005 $0.21
Dec2004 $0.14
Dec2003 $0.16
Dec2002 $0.30

Recommended Reading:

Other ModernGraham posts about the company

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CTS Corporation Valuation – Initial Coverage $CTS

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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