CTS Corporation (CTS): A Sensor Maker Quietly Becoming a Medical Company

Disclosure: I own shares. This is my personal research, not investment advice.

CTS has been making sensors and electronic components since 1896. Most of what it sells is invisible: the position sensor in a Toyota pedal, the thermistor inside a heat pump, the piezoelectric ceramic that generates the pulse in an ultrasound probe. At ~$55 it trades around 11x trailing EBITDA, the middle of its own 10x to 14x range, with net cash and a free cash flow yield near 6%.

My thesis is that the consolidated growth rate hides a mix shift that has already done most of its work.

A shrinking business funding three growing ones

For a decade CTS used its auto and truck business, two-thirds of sales in 2013, as the cash source for twelve acquisitions in piezoelectric materials, temperature sensing, current sensing and naval sonar. Not one has been written down. Transportation shrank 1% to 4% a year the whole time, from Cummins' truck cycle and Japanese automakers losing share in China. Everything else compounded at 11% to 12%.

Because the shrinking leg was so large, total revenue grew only 2% a year. But gross margin went from 30% to 38% and EBITDA compounded near 10%. Transportation is now 41% of sales and falling. The arithmetic flips from here: the same growth rates by segment produce accelerating consolidated growth every year, with no acquisition required.

The fastest piece is medical, up 21% last year and 37% in the first half, driven by ultrasound skin-tightening and therapeutic ultrasound devices whose makers are growing 40% to 100%. CTS makes the single-crystal and textured ceramics those transducers need.

Why I think it can keep going

• Diversified markets are 58% of sales at the highest margins in the company. Gross margin hit a record 41.5% last quarter and guidance was raised twice this year.
• Chip-based transducers are displacing piezo in diagnostic imaging, but no published device reaches the power that therapy and aesthetics need. Once a material is inside an FDA-cleared device, swapping it means a new 510(k).
• The acquisition record earns roughly 13% to 15% pre-tax on $400M deployed. Net cash and a $300M undrawn revolver mean the next deal is a matter of finding it.
• Stock comp is under 1% of sales, buybacks shrink the share count 2% to 3% a year, and adjusted EPS does not add back amortization.

What could make me wrong

• The CEO who did every deal moved to an undefined Executive Chairman role in July and sold a third of his stake on the way out. The new CEO is an operator from Eaton and Cummins with no deal record.
• Medical growth could rest on one to three aesthetics customers. CTS names none of them, and the arithmetic allows a single customer to be two-thirds of the segment.
• A competitor has asked the EU to revoke the lead exemption that single-crystal piezo depends on. The decision is overdue.
• The $128M sonar acquisition ran below its earnout plan in 2025 and needed two accounting corrections.
• Transportation has not found a bottom, and new programs launch at lower margins.

Bottom line

I underwrote CTS as fairly priced for a 20% return and took a half-size position. This is not a mispricing. It is a high-quality compounder at a fair price whose downside is bounded by cash and whose upside depends on medical staying what it has been for two years. I need the mix shift to keep doing what it has done for a decade, under a new CEO.