CTS Corporation Stock Is A Sleeper Play For The Budding Rebound

CTS Corporation Is Fundamental To The Recovery

CTS Corporation (NYSE:CTS) is among a quietly thriving group of companies that are perfectly positioned for the recovery. CTS Corporation, like PPG Industries (NYSE:PPG), H.B. Fuller (NYSE:FUL), and Avient (NYSE:AVNT), manufactures and markets supplies that are not only fundamental to the manufacturing industry at large but also very, very necessary for several accelerating global trends.

In the case of CTS Corporation, this means electrical components, sensors, and actuators. The company’s clients rank among the world’s leading OEM manufacturers and tier-one suppliers servicing the automotive, aerospace/defense, information technology, medical, industrial, and transportation industries. Industries supported by trends like 5G, EV, the cloud, healthcare, and consumer technology.

CTS Falls After Cautious Guidance

CTS Corporation issued a very solid Q4 report and a positive, if cautious, outlook for the 2021 fiscal period. The company pulled in $123 million in net consolidated revenue for the quarter which is up to both sequentially and from last year. The revenue is up nearly 9.0% from last quarter and 7% from last year as business accelerates to its pre-pandemic levels. The revenue strength was driven by a 12% gain in the transportation segment that was offset in flat to slightly higher revenue in all other segments.

Moving down to the margins, the revenue gains were accentuated by a margin improvement worth 110 basis points for both adjusted gross and operating margins. Adjusted margin rose to 21.4% from last year’s 20.3% to drive solid gains on the bottom line. On the bottom line the GAAP EPS of $0.46 grew 50% from last year and beat the consensus by $0.11. On an adjusted basis, EPS grew 16% from last year and beat by $0.09.

The company says it is still on track to meet or exceed its 2025 targets despite the pandemic. The company is targeting 10% annualized revenue growth and is planning on meeting that goal through organic and acquisitional gains. The guidance for 2021 is good albeit the margin for error is quite wide. The company is expecting revenue in the range of $430 to $490 million with EPS running $1.20 to $1.60. That compares with the consensus of $450 in revenue and $1.45 earnings and does not factor in what we think could be a very strong economic rebound in the second half of the year.

A Value And A Safe Dividend, With A Catch

CTS Corporation offers a bit of a value compared to the broader market trading at 20X its 2021 EPS consensus estimate. Assuming that the company’s guidance is cautious and that revisions will narrow the range toward the high-end the value is even deeper and there is also the dividend to consider. The company is not known as a dividend-grower but has paid a very stable and reliable distribution for over a decade with some increases in its history. The balance sheet is in great shape, the payout ratio is a mere 10%, and business is accelerating so there is no reason to fear a cut or suspension. The catch is the yield. AT only 0.50% it doesn’t offer much other than stability.

The Technical Outlook: A Make Or Break Moment For CTS Corporation

The shares of CTS Corporation initially moved higher after the Q4 release but the market couldn’t hold the gains. By the end of the session, the stock was down 2.0% and showing resistance at the short-term moving average. The indicators are still mixed but are consistent with a shift in momentum that could take the stock higher if resistance at the EMA can be broken. If that were to happen investors might expect to price action move up to the $36 level. If not then a retest of the $30 level is the more likely scenario. Longer-term, however, we see this stock moving higher as the economic recovery gains momentum.