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TE Connectivity: A Bill Nygren Bargain Stock

- By Jonathan Poland

Twenty years ago, few ever thought about data in their day-to-day activities. Now, everyone is concerned about data privacy, usage and how fast it can be delivered at a moment's notice. It's the utility of our daily lives, and TE Connectivity Ltd. (TEL) is a global leader underlying the connection and flow of power and data for millions, with customers across the transportation, industrial and communications markets.


With the need for data in our everyday lives only ramping up, TE Connectivity is in an envious position for long-term growth.

Growth has been slow on the top line, with the company moving up from $10 billion in sales in 2009 to north of $14 billion in the last 12 months. However, on the bottom line, the company has gone from losing $3.2 billion to earning over $2.5 billion over the same period. It has also done so while limiting capital spending to less than 40% of net income and buying back over 100 million shares (24%), fueling growth in book value and earnings per share.

TE sold its subsea communications business to Cererbus Capital at the end of last year, collecting $325 million in cash, allowing the company to reduce cyclicality and garner higher margins by staying focused on its connectivity and sensor business, where it has greater economic advantages. Management plans to use the funds for additional share buybacks, a good idea considering the stock is at the lower end of its 52-week range.

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TE Connectivity reported first-quarter numbers on Jan. 23, booking $1.29 per share in earnings on $3.35 billion in sales, beating earnings expectations by 1 cent and missing revenue estimates by $30 million. The company expects to earn $5.70 a share this year and over $6.25 per share next year. If that does come to fruition and its stock is priced closer to historical multiples, investors could easily see the stock back above $100 a share.

As for Bill Nygren (Trades, Portfolio), the chances of liquidating the position are slim. The guru investor has owned the stock since 2008, when it was trading below $20 a share. At that price point, his fund is receiving over 10% a year in dividends, which alone should be enough to outperform the S&P 500 in the years to come.

New investors will receive over 2.25% in dividends and should continue to see the company steadily grow over the next decade thanks to the trends driving increased connectivity, emissions and efficiency standards. With TE being a leading supplier of products necessary to communication in harsh climates, its hard to see its customers looking to switch anytime soon. At its current price, the stock is a buy.

Disclosure: I am not long or short TEL.

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This article first appeared on GuruFocus.