BUSINESS
CTS Corporation manufactures and sells sensors, actuators, and connectivity components in North America, Europe, and Asia. The company provides sensors and actuators for use in passenger or commercial vehicles; connectivity components for telecommunications infrastructure, information technology, and other high-speed applications; switches, temperature sensors, and potentiometers supplied to multiple markets; and fabricated piezoelectric materials and substrates used primarily in medical, industrial, aerospace and defense, and information technology markets. In addition, the company sells and markets its products through its sales engineers, independent manufacturers’ representatives, and distributors. CTS Corporation was founded in 1896 and is headquartered in Lisle, Illinois.
INVESTMENT RATING
With future capital returns forecasted to exceed the cost of capital, CTS is expected to continue to be a Value Builder.
CTS has a current Value Trend Rating of D (Negative).
This rating combines consistent signals from two proprietary PTR measures of a stock’s attractiveness. CTS has a neutral Power Rating of 45 and a slightly negative Appreciation Score of 33, and the Negative Value Trend Rating results.
CTS’ stock is selling above targeted value. The current stock price of $45.59 compares to targeted value 12 months forward of $42.
This moderately low appreciation potential results in an appreciation score of 33 (67% of the universe has greater appreciation potential.)
CTS has a Power Rating of 45. (This neutral Power Rating indicates that CTS’ chances of enjoying attractive investment performance over the near to intermediate term are only average.)
Factors contributing to this neutral Power Rating include: the trend in CTS’ earnings estimates has been unfavorable in recent months; and the Electronic Computer, Accessories comparison group is currently in an unfavorable position. An offsetting factor is recent price action has been neutral.
INVESTMENT PROFILE
CTS’ financial strength is high. Financial strength rating is 81.
Relative to the S&P 500 Composite, CTS Corp has both Growth and Value characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that CTS is lower risk. Relative weaknesses include: low historical profitability, and high earnings variability. CTS’ valuation is moderate: low dividend yield, moderate P/E ratio, and moderate price/book ratio. CTS has unusually low market capitalization.
CURRENT SIGNALS
CTS’ current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; and falling leverage.
CTS’ current technical position is very strong. The stock price is in a 5.1 month up move. The stock has appreciated 27.5% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.
ALERTS
CTS Corp (NYSE: CTS) has recently experienced slight negative changes in fundamentals: significant quarterly earnings deceleration occurred.
The stock is currently rated D.
CTS Corp (NYSE: CTS) stock declined modestly by -1.9% on 4/10/24. The stock closed at $45.59. Trading volume in this decline was normal. The stock has performed in line with the market over the last nine months and has risen 1.3% during the last week.
CASH FLOW
In 2023, CTS generated an increase in cash of +$7.0 million (+4%). Sources of cash were very slightly larger than uses. Cash generated from 2023 EBITDA totaled +$111.8 million. Non-operating uses consumed -$4.1 million (-4% of EBITDA). Cash taxes consumed -$15.9 million (-14% of EBITDA). Re-investment in the business amounted to -$28.6 million (-26% of EBITDA). On a net basis, debt investors removed -$16.3 million (-15% of EBITDA) while equity investors received -$39.9 million (-36% of EBITDA).
CTS’ Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Cts Peer Group. (Since 2021 Non-operating Income, %EBITDA has experienced a very sharp recovery.) In most years, CTS was in the lower quartile and second quartile. Currently, CTS is slightly above median at -4% of EBITDA (-$4.1 million).
CTS’ Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Cts Peer Group. (Since 2021 Cash Taxes, %EBITDA has experienced a very sharp decline.) In most years, CTS was in the third quartile and top quartile. Currently, CTS is above median at -14% of EBITDA (-$15.9 million).
CTS’ Business Re-investment, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Cts Peer Group. In most years, CTS was in the top quartile and third quartile. Currently, CTS is upper quartile at -26% of EBITDA (-$28.6 million).
CTS’ Debt Investors, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the Cts Peer Group. In most years, CTS was in the second quartile and top quartile. Currently, CTS is slightly below median at -15% of EBITDA (-$16.3 million).
CTS’ Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Cts Peer Group. (Since 2021 Equity Investors, %EBITDA has experienced a very sharp decline.) In most years, CTS was in the top quartile and lower quartile. Currently, CTS is substantially below median at -36% of EBITDA (-$39.9 million).
CTS’ Change in Cash, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Cts Peer Group. (Since 2021 Change in Cash, %EBITDA has experienced a very sharp decline.) In most years, CTS was in the third quartile and second quartile. Currently, CTS is slightly above median at +6% of EBITDA (+$7.0 million).
CTS’ Cash, %Revenue has experienced a downtrend over the period. This downtrend was accompanied by stability for the Cts Peer Group. (Since 2019 Cash, %Revenue has experienced a minor recovery.) In most years, CTS was in the second quartile and top quartile. Currently, CTS is above median at +30%.
PROFITABILITY
CTS’ return on equity has eroded very significantly since 2014. The current level is 11.5% versus the high of 9.2% and the low of -9.0%.
This very significant erosion was due to very strong negative trend in pretax operating return and small positive trend in non-operating factors.
The productivity of CTS’ assets declined over the full period 2014-2023: asset turnover has experienced a minor downtrend.
Reinforcing this trend, pretax margin experienced a strong overall downtrend although it experienced a very sharp recovery after the 2021 low.
Non-operating factors (income taxes and financial leverage) had a minor positive influence on return on equity.
CTS’ return on equity is at the upper quartile (11.5%) for the four quarters ended December, 2023.
Operating performance (pretax return on assets) is at the upper quartile (10.1%) reflecting asset turnover that is at median (0.74X) and pretax margin at the upper quartile (13.7%).
Tax “keep” rate (income tax management) is at median (80.5%) resulting in after tax return on assets that is at the upper quartile.
Financial leverage (leverage) is at the lower quartile (1.41X).
GROWTH RATES
There are no significant differences between CTS’ longer term growth and growth in recent years.
CTS’ historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.
Annual revenue growth has been 4.7% per year.
Total asset growth has been 5.9% per year.
Annual E.P.S. growth has been 17.6% per year.
Equity growth has been 7.7% per year.
CTS’ consensus growth rate forecast (average of Wall Street analysts) is 16.0% — substantially above the average of the historical growth measures.
Relative to the Cts Peer Group, CTS’ historical growth measures are generally third quartile. E.P.S. growth (17.6%) has been upper quartile. Equity growth (7.7%) has been below median. Revenue growth (4.7%) has been at the lower quartile. Total asset growth (5.9%) has been at the lower quartile.
In agreement with this pattern, consensus growth forecast (16.0%) is at the upper quartile.
PRICE HISTORY
Over the full time period, CTS’ stock price performance has been variable and in line with the market. Between June, 2013 and April, 2024, CTS’ stock price rose +234%; relative to the market, this was a +4% gain. Significant price move during the period: 1) February, 2016 – August, 2018: +156%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of 3.3% is below median relative to the S&P 500 Composite.
In addition to being below median relative to S&P 500 Composite, current annual total return performance through February, 2024 of 3.3% is below median relative to CTS Corp Peer Group.
Current 5-year total return performance of 7.3% is below median relative to the S&P 500 Composite.
Through February, 2024, with below median current 5-year total return of 7.3% relative to S&P 500 Composite, CTS’ total return performance is at the lower quartile relative to CTS Corp Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, CTS’ overall valuation is normal. The highest factor, the ratio of enterprise value/assets, is above median. Price/earnings ratio is slightly below median. Ratio of enterprise value/earnings before interest and taxes is below median. Price/equity ratio is below median. The lowest factor, the ratio of enterprise value/revenue, is below median.
Relative to CTS Peer Group, CTS’ overall valuation is normal. The highest factor, the ratio of enterprise value/revenue, is slightly above median. Ratio of enterprise value/assets is at the upper quartile. Price/equity ratio is slightly above median. Price/earnings ratio is at median. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is slightly below median.
CTS has a very large value gap compared to the median. For CTS to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 2.73X to 1.99X. If CTS’ ratio of enterprise value/revenue were to fall to 1.99X, its stock price would be lower by $-13 to $32.
For CTS to achieve upper quartile valuation relative to the CTS Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 2.73X to 5.38X. If CTS’ ratio of enterprise value/revenue were to rise to 5.38X, its stock price would increase by $47 from the current level of $46.
VALUE TARGETS
With future capital returns forecasted to exceed the cost of capital, CTS is expected to continue to be a Value Builder.
CTS’ current Price Target of $43 represents a -6% change from the current price of $45.59.
This moderately low appreciation potential results in an appreciation score of 33 (67% of the universe has greater appreciation potential.)
Reinforcing this moderately low Appreciation Score of 33, the neutral Power Rating of 45 contributes to an Value Trend Rating of D.
CTS’ current Price Target is $43 (+2% from the 2023 Target of $42 but -6% from the 04/10/24 price of $45.59). This plateau in the Target is the result of a +3% increase in the equity base and a -1% decrease in the price/equity multiple. The forecasted increase in cost of equity has a very large negative impact on the price/equity multiple and the forecasted decline in growth has a large negative impact as well. Partially offsetting these Drivers, the forecasted increase in return on equity has a very large positive impact.
PTR’s return on equity forecast is 14.0% — in line with our recent forecasts. Forecasted return on equity exhibited a slight, erratic increase between 2015 and 2023. The current forecast is well above the 2020 low of 8%.
PTR’s growth forecast is 7.0% — below our recent forecasts. Forecasted growth enjoyed a dramatic, steady increase between 2018 and 2023. The current forecast is above the 2018 low of 4%.
PTR’s cost of equity forecast is 9.0% — in line with recent levels. Forecasted cost of equity suffered a dramatic, erratic increase between 2015 and 2023. The current forecast is above the 2015 low of 6.1%.
At CTS’ current price of $45.59, investors are placing a positive value of $18 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 12.0% per year, and a return on equity of 11.4% versus a cost of equity of 8.0%.
PTR’s 2025 Price Target of $43 is based on these forecasts and reflects an estimated value of existing assets of $34 and a value of future investments of $9.
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