CTS Corporation: Strong Rally to Follow When Trade War Risk Fades

CTS Corporation Strong Rally to Follow When Trade War Risk Fades
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CTS to Rally on Stabilization in Global Trade Risk

The upheaval in the global trade environment has made it difficult for many U.S. companies that operate manufacturing facilities. But my view is that the China issue and other trade deals will eventually be worked out, albeit they could take a long time and extend past the next election.

The trade risk has gripped many trade-related stocks, but sometimes it makes sense to buy when everyone else is running for the exits.

On this note, CTS Corporation (NYSE:CTS) fits the situation, down 8.3% this year and down 25.6% over the past year.

Trading at 26% off its 52-week high, CTS stock offers a decent risk-reward situation.

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CTS manufactures sensors, actuators, and electronic components for a broad range of industries from 12 facilities in North America, Asia, and Europe. China has two plants while Asia has six.

The transportation segment is the major focus, but CTS is aiming to diversity its client base in areas such as aerospace, communications, defense, industrial, information technology, and medical.

With China and Europe accounting for about 46% of the company’s revenues, the trade risk is obvious and needs to be considered when looking at CTS stock.

The following chart shows CTS stock attempting to break out from a sideways channel on rising relative strength, as well as showing a bullish moving average convergence divergence:

Chart courtesy of StockCharts.com

A sustained breakout could see CTS stock move toward $30.00-$32.00 prior to testing its 52-week high at $38.00.

My Bull Case for CTS Stock

Given the trade risk, CTS Corporation clearly has plenty of work to do—and also hopes that the international trade situation can be resolved.

The company’s revenues have largely been flat for the last five years, but CTS  managed to drive them up 11% to a five-year high in 2018, as the following table shows:

Fiscal Year Revenue (Millions) Growth
2014 $404.0
2015 $382.3 -5.4%
2016 $396.8 3.8%
2017 $423.5 6.7%
2018 $470.1 11%

(Source: “CTS Corp.,” MarketWatch, last accessed July 19, 2019.)

The problem is that the trade uncertainty will make things difficult for the company. CTS is estimated to report flat revenues of $469.9 million in 2019 and follow this up with a six-percent rebound to $498.0 million in 2020. (Source: CTS Corporation (CTS),” Yahoo! Finance, last accessed July 19, 2019.)

Of course, the wild cards will be the trade issue and the possibility of global economic slowing in 2020.

In the meantime, CTS has been delivering positive earnings before interest, taxes, depreciation, and amortization (EBITDA), including a jump of 42% in 2018.

Fiscal Year EBITDA (Millions) Growth
2014 $67.2
2015 $47.4 -29.4%
2016 $74.6 57.3%
2017 $65.1 -12.8%
2018 $92.4 42%

(Source: MarketWatch, op. cit.)

CTS Corporation is also consistently profitable on both a generally accepted accounting principles (GAAP) and adjusted basis. GAAP earnings per share (EPS) surged 222.3% to a five-year high in 2018.

Fiscal Year GAAP-Diluted EPS
2014 $0.78
2015 $0.21
2016 $1.03
2017 $0.43
2018 $1.39

(Source: MarketWatch, op. cit.)

For 2019, CTS is expected to lift its adjusted EPS to $1.59, followed by $1.76 in 2020. (Source: Yahoo! Finance, op. cit.)

Furthermore, CTS has been reporting positive free cash flow (FCF), which is a good thing as the company works things out.

Fiscal Year FCF (Millions) Growth
2014 $19.5
2015 $29.4 51.1%
2016 $26.7 -9.3%
2017 $40.0 49.6%
2018 $29.7 -25.8%

(Source: MarketWatch, op. cit.)

Analyst Take

The immediate threat for CTS Corporation is the ongoing trade battles. A resolution would be bullish for its stock price.

Insiders have been picking up CTS stock to the tune of 90,626 shares over the last six months. The thinking is that insiders know a lot more about their company than outsiders do. (Source: Yahoo! Finance, op. cit.)

So while the trade risk is real, there’s no reason to not believe that deals are coming, and this would help CTS stock.