Sensata appoints new director to boost shares, as activist Elliott settles.

Company: Sensata Technologies (ST)

An industrial technology company, Business, specializes in developing, manufacturing, and selling sensors, electrical protection components, and other products. The company has two units: Performance Sensing and Sensing Solutions. Performance Sensing serves the automotive, heavy vehicle, and off-road industries with sensors, high-voltage solutions, and other offerings. Sensing Solutions, on the other hand, focuses on the industrial and aerospace industries, providing a range of application-specific sensor and electrical protection products for various industrial markets.

Stock Market Value: $6.38B ($42.34 per share)

Activist: Elliott Investment Management

Elliott is the largest investor in the company, with economic ownership at or above $600 million (10%), but it is likely that the actual ownership is closer to $1 billion due to Elliott's history.

Average Cost: n/a

Elliott is a highly skilled and successful activist investor who leads a team of experts from top tech private equity firms, engineers, and former technology CEOs and COOs. When evaluating an investment, the firm employs a range of consultants, including specialty and general management consultants, expert cost analysts, and industry specialists. Elliott typically watches companies for years before investing and has a strong pool of impressive board candidates. Historically, the firm has focused on strategic activism in the technology sector and has achieved great success with that approach. However, in recent years, Elliott's activism group has expanded and evolved, and it has been doing more long-term activism and creating value from a board level at a broader range of companies.

What's happening

On April 29, Jeff Cote retired as CEO and president of the company and stepped down from the board. Martha Sullivan was appointed interim president and CEO. At the same time, Sensata announced that Elliott settled for a board seat for Phillip Eyler, president and CEO of Gentherm, effective on July 1. The company also established a CEO search committee, to which Eyler was appointed, and he joined the nominating and governance committee.

Behind the scenes

Sensata is a leading sensor manufacturer, with a strong focus on the auto-supply space. Its products include car seats, airbags, tires, and CO2 sensors. With an 80% market share, Sensata is three times the size of its closest competitors. The company manufactures over 1 billion sensors per year, giving it a tremendous scale advantage and low costs. However, Sensata's sensors are not off-the-shelf products; they are custom-made for each application, and the company has proven to add value to this process. Despite this, Sensata has underperformed over the past one-, three-, and five-year periods, with losses of 7.28%, 30.23%, and 19.33%, respectively. This compares to the Russell 2000's one-, three-, and five-year returns of 14.99%, -8.10%, and 34.11%, respectively. Additionally, Sensata has significantly underperformed its peers.

The underperformance of Sensata's stock price is linked to capital allocation errors made by CEO Jeff Cote during his tenure from March 2020 to April 2024. Specifically, the company's entry into the non-core telematics industry with the acquisition of Xirgo Technologies for $400 million in April 2021 and the acquisition of SmartWitness Holdings, a video telematics technology innovator for commercial fleets, led to a shift in focus, capital, and resources away from the core business. This resulted in declining operating margins and compressed trading multiples. Currently, the stock is trading at par with worst-in-class peers.

Capital allocation practices need to be improved to create value. This requires a new management team that will avoid overpaying for non-core businesses and focus on core operations. The company has already taken a step in this direction by announcing Cote's retirement and appointing Martha Sullivan as interim president and CEO. Sullivan has a track record of creating value through capital allocation, as opposed to destroying it.

Sensata has valuable assets in its portfolio that could be attractive for a strategic transaction. The company has opportunities to divest non-core businesses, such as Dynapower and the aerospace business, which could be worth $2 billion. The ideal time for a company to be acquired is when it is between CEOs, and an activist's involvement makes it even more likely. Potential acquirers have been interested in Sensata, and they are likely looking even harder now after the recent developments.

Despite the company's strategic efforts, a secular trend could significantly benefit its core sensor business. As Sensata sensors are used in both combustion and electric vehicles, the growing trend towards hybrid vehicles presents a 2-for-1 demand for its products. Sensata has already experienced increased demand from this trend, and it is expected to continue as hybrids become more popular.

The initial challenge for most activist campaigns is gaining entry and getting the company to hear them out. In this case, that challenge has been overcome. On April 29, Elliott reached a settlement with Sensata, resulting in the establishment of a new CEO search committee and the resignation of CEO Cote. Elliott has a history of taking board seats for its own principals, and it is significant that the firm chose to settle for a non-Elliott board member in this instance. Eyler, with his qualifications and industry experience, should be a valuable addition to the board in supporting management with operational issues. However, if Sensata or its divisions are potential acquisition targets, it would be beneficial to have an Elliott executive on the board to help evaluate competing offers.

Ken Squire is both the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.