Guilt by association may be a buying opportunity for shares of CTS

At some point in the past week, investors became concerned the Toyota Motor (TM) sudden acceleration recall was perhaps about to impact CTS Corp. (CTS). The shares, which traded as high as $10.36 in early January, traded down to $7.68 as of yesterday’s close.

CTS issued two press releases and spent a great deal of time on its quarterly conference call trying to ease investors’ concerns.

Specifically, CTS stated that since the problem of sudden unintended acceleration has been reported to have existed in some Lexus vehicles and Toyota vehicles going back to 1999 when CTS did not even make this product for any customer. CTS believes that the rare slow return pedal phenomenon, which may occur in extreme environmental conditions, should absolutely not be linked with any sudden unintended acceleration incidents.

Further, the firm went on to say it is not aware of any accidents and injuries caused by the rare slow return pedal condition, to the best of its knowledge.

Management pointed out it does not, and has never made, any accelerator pedals for Lexus vehicles and that CTS also has no accelerator pedals in Toyota vehicles prior to model year 2005.

Our View

CTS remains well positioned to achieve solid revenue growth and operating leverage as end markets turn around in the long run, given the company’s competitive advantage led by innovation and laser-like focus on expense management. The slower-growing EMS segment has been exceptionally diversified since 2004 and is a complement to the faster-growing Sensors and Actuators and Electronic Components business.

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