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What's in Store for TE Connectivity (TEL) in Q1 Earnings?

Zacks Equity Research

TE Connectivity Ltd. TEL is scheduled to report first-quarter fiscal 2018 results before the opening bell on Jan 24.

TE Connectivity has an excellent earnings surprise history, with an average positive surprise of 9.7% in the trailing four quarters. The company recorded its eight consecutive earnings beat in the last reported quarter, surpassing estimates by 7.8%. In the quarter to be reported, the company is expected to report strong revenues in Transportation Solutions business, which constitutes more than half of its total revenues.

We expect TE Connectivity to score an earnings beat in the to-be-reported quarter.

Why a Likely Positive Surprise?

Our proven model shows that TE Connectivity has the right combination of the two key ingredients. A stock needs to have both a positive

Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is perfectly the case here as you will see below:

Zacks ESP: TE Connectivity has an Earnings ESP of +0.26%. You can uncover the best stocks to buy or sell before they’re reported with our

Earnings ESP Filter.

TE Connectivity Ltd. Price and EPS Surprise

TE Connectivity Ltd. Price and EPS Surprise | TE Connectivity Ltd. Quote

Zacks Rank: The company carries a Zacks Rank #3, which when combined with a positive ESP, makes us reasonably confident of an earnings beat.

Conversely, we caution against stocks with a Zacks Ranks #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

Factors Driving the Better-than-Expected Results

TE Connectivity is now poised to grow on the back of strong demand in end markets, along with its overarching business model and continued progress on strategic priorities. The company’s Commercial transportation business is showing remarkable signs of progress, driven by the content expansion in the heavy truck market, especially in China. Growth in electronic content and a rich pipeline of platform ramps from design wins bode well for its transportation business. Additionally, the sensor business is anticipated to see strong design win momentum, fueled by the growth of automotive space, which is likely to prove conductive to upcoming results.

Notably, the Zacks Consensus Estimate for revenues from the Transportation Solutions segment in the to-be-reported quarter currently remains high at $1,867 million compared with fiscal fourth-quarter revenues of $1,844 million. However, revenues from Industrial Solutions segment are anticipated to be low sequentially, with an estimate of $869 million compared with reported revenues of $954 million in the prior quarter.

Moreover, being a market leader in the connectivity and sensor business, the company is armed with a comprehensive portfolio that supplements its strength. About 80% of the company’s revenues are driven by harsh environment applications. Over the past five years, its harsh business applications have experienced mid-single digit growth, driving top-line growth. Going forward, we believe that this business will provide ample opportunities of margin expansion.

This apart, the company’s ardent eye for acquisitions is anticipated to be conducive to core business, going forward. The company’s buyout of MicroGroup and agreement to acquire Hirschmann Car Communication enhanced its harsh environment portfolio and are expected to drive first-quarter fiscal sales as well.

However, primarily dependent on end market dynamics the company’s business is subject to cyclical risks that the end markets suffer. Though the company has witnessed some stability in direct business with OEMs, poor sales through distribution channels are taking longer-than-expected recovery time, consequently hurting segmental performance. Additionally, the company’s weakness in commercial transportation market due to weak global construction and agriculture markets, along with weakness in the North America heavy truck markets, have been adding to woes

Further, sluggishness in oil and gas markets and its derivative impact on other industrial markets will likely act as strong headwinds for the company. Also, helicopter demand has also been impacted adversely, which can prove to be a drag on the company’s aerospace business. This apart, the company believes the supply chain inefficiencies can prove to be a drag on the earnings in the quarter under review.

Other Stocks to Consider

Here are some other companies that you may want to consider, as our model shows that these too have the right combination of elements to post an earnings beat this quarter:

Analog Devices, Inc. ADI has an Earnings ESP of +0.96% and a Zacks Rank #1.  You can see the complete list of today’s Zacks #1 Rank stocks here.

AMTEK, Inc. AME has an Earnings ESP of +0.12% and a Zacks Rank #2.

Harris Corporation HRS has an Earnings ESP of +0.29% and a Zacks Rank #2.

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