Sensors and Controls: Investing Essentials

The basics of investing in the sensors and controls industry.

Aug 7, 2014 at 1:26PM

Although they're not as flashy as some other technologies, sensors and controls are critical components of many of the products that we frequently use. For instance, cars, jets, and home appliances are jam packed with them.

Sensors take a physical input, such as pressure or temperature, and convert that input into an electrical signal that a computer-based system can use. Controls, on the other hand, are devices that are built into systems to keep them from overheating and/or being fed too much current.

Given how critical sensors and controls are, let’s take a closer look at the industry.

What is the sensors and controls industry?

The sensors and controls industry consists of companies that design and sell sensors and controls. Now, as Sensata Technologies – a leading independent sensors and controls vendor – notes, these companies can either be independent vendors of sensors and controls or in-house development teams at the vendors of the end-products that require sensors and controls.

Sensors often measure a variety of types of input, including: pressure, speed, position, temperature, and force. Some of these sensor types, such as pressure sensors, have far-reaching uses in automotive, industrial, and marine applications. Others, such as force sensors – found in automotive applications – are fit for a narrower set of use cases.

To get a sense of what controls are and what types are available, it’s worth looking at Sensata’s core product offerings, which include:

  • Bimetal electromechanical controls: These are commonly used in applications such as lighting and household appliances to prevent overheating and having too much current driven through the devices.
  • Thermal and magnetic-hydraulic circuit breakers: These devices help prevent damage from thermal and electrical overload. Found in many applications including medical devices, electronic power supplies, and industry.
  • Power inverters: These convert direct current power to alternating current power. For example, if a device needs alternating current -- think power from a wall outlet -- but one wants to power it using a battery (direct current), a power inverter is needed. 
  • Interconnection products: Semiconductor companies use these products to test the reliability of their own finished products.

With such a rich set of product offerings, the next aspect worth exploring is the size of the industry in dollar terms.

How big is the sensors and controls industry?

Sensata estimates that its annual served addressable market in the sensor space is $6.8 billion. This opportunity breaks down into about $1.85 billion for pressure sensors and switches, $1.73 billion for speed sensors, $610 million for high temperature sensors, and $2.64 billion for position sensors.

The controls market is significantly smaller, with Sensata citing an annual served addressable market of about $1.3 billion. The breakdown by product category comes out to about $163 million for power inverters, $367 million for power protection, $632 million for motor protection, and $145 million for interconnection.

Given that this one company claimed a total served addressable market of $8.1 billion, the full addressable market (which may include segments that Sensata does not participate in) is likely even larger.

How does the sensors and controls industry work?

The sensors and controls industry is, like many technology industries, very research and development-intensive. Companies that can consistently deliver products on time that meet specification, and do so at the right cost structures, are poised to succeed.

Further, although the general types of sensors and controls are standard, Sensata claims that these products – depending on the application – can require quite high degrees of customization. This means that independent vendors need to engage with potential customers early on in those customers’ respective product development cycles, particularly as these vendors often need to compete with the in-house operations of some of their larger customers.

Additionally, Sensata claims that since there is extensive engineering work done in conjunction with supplying components into a given design (leading to very high switching costs), its sales teams dedicate much of their efforts on “’early entry’ into new applications rather than the displacement of existing suppliers in mature applications .”

This means that if a vendor is firmly entrenched in a market, barring some serious execution gaffes, that vendor is likely to remain entrenched.

What drives the sensors and controls industry?

The sensors and controls industry is driven by the technological needs of end customers. For example, Sensata notes that as safety, energy efficiency, and emissions standards continue to tighten, the opportunity to embed more -- and more sophisticated -- sensors and controls into many products drives longer-term industry growth. 

In addition to more sensors and controls within end products, the growth in sales of those actual products is also a key driver of the sensors and controls industry.

Further, given that this industry is highly competitive, there is a continued need to lower overall product cost through both engineering might in addition to ever-better sourcing strategies. One such strategy that delivered 5% cost savings for Sensata in 2013 is “best cost sourcing”. Best-cost country sourcing, according to Accenture  , refers to sourcing decisions that are “made more based on total cost rather than lowest price.”

Warren Buffett’s worst auto-nightmare (Hint: It’s not Tesla)
A major technological shift is happening in the automotive industry. Most people are skeptical about its impact. Warren Buffett isn’t one of them. He recently called it a “real threat” to one of his favorite businesses. An executive at Ford called the technology “fantastic.” The beauty for investors is that there is an easy way to ride this mega-trend. Click here to access our exclusive report on this stock.


Ashraf Eassa has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information