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CTS: Organic growth of nearly 11% Y/Y pushed revenue and earnings to new highs. We are increasing our target price to $32 a share.

By Ian Gilson, PhD, CFA


CTS Corporation's (NYSE:CTS) first quarter 2018 results were above our estimates due mainly to above average revenue growth of 10.8% organic plus $2.6 million from the Noliac acquisition.

Due to the need to preserve expert knowledge from many years of production in Indiana CST spent an above average amount of money in transferring production to Illinois. This had a negative impact on gross margins so gross profit was close to our estimate. Increases in S.G.&A. were offset by translation gains (whereas we had forecast a currency loss) so pretax income was $15.3 million versus our estimate of $13.5 million.

Gross margins should improve over the next three or four quarters and we have adjusted our forecasts to reflect higher growth and improving profitability.

The new and so far proposed tariff laws should have a very minor impact on profits this year which could be offset by small changes in operating expenses.

Revenue from the three largest customers (Cummins Inc. (CMY$162);Toyota Motor (TM $131); and Honda Motor (HMC $34.75)) increased at a significant rate Y/Y. Cummins grew from revenue of $12.9 million in the first quarter of 2017 to $16.1 million in 1Q18, an increase of nearly 25% with sequential growth in each of the last five quarters.

CTS Corp. is introducing a number of new products in the Medical and Telecom markets as well as a continuing evolution in transportation pollution control that should grow at an above average rate over the next few years with better than average margins.

Based on the higher growth in revenue, improving margins and new product stream we are increasing our target from $28 a shares to $32 a share.


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