A month has gone by since the last earnings report for TE Connectivity (TEL). Shares have added about 7% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is TE Connectivity due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
TE Connectivity's Q3 Earnings & Revenues Beat Estimates
TE Connectivity reported third-quarter fiscal 2020 adjusted earnings of 59 cents per share, beating the Zacks Consensus Estimate by 40.5%.
However, the bottom line declined 60.7% on a year-over-year basis and 54.3% sequentially.
Net sales in the reported quarter were $2.5 billion, which surpassed the Zacks Consensus Estimate of $2.4 billion. However, the figure slumped 24.8% from the year-ago quarter and 20.2% from the previous quarter.
The year-over-year decline can be attributed to weakness across the key end-markets, which affected performance of Transportation and Industrial segments in the reported quarter. Moreover, coronavirus-induced disruptions remained concerns.
Further, the company’s total orders came in at $2.4 billion during the quarter under review, which declined 29.1% sequentially.
Nevertheless, the company’s global manufacturing strategy and solid growth in data center market remained positives.
Additionally, strong performance by Communications segment in the fiscal third quarter was a tailwind.
However, uncertainties related coronavirus pandemic remain concerns.
Nevertheless, continued solid execution of the company’s strategic plans especially cost reduction and footprint consolidation initiatives are key catalysts.
Top-Line in Detail
TE Connectivity operates in three organized segments.
Transportation Solutions: The company generated sales worth $1.3 billion (49.3% of net sales) in the reported quarter, down 36.2% on a year-over-year basis. This can be attributed to weakness in auto production globally, which resulted in a year-over-year decline of 44% in automotive sales. Further, sluggishness in commercial transportation led to year-over-year fall of 27% in sales from this particular space. Additionally, TE Connectivity experienced 3% decrease in the sensors business year over year.
Industrial Solutions: This segment generated sales of $865 million (33.9% of net sales), which fell 13.9% year over year. This was primarily due to sluggishness in the commercial aerospace that led to decline of 23% year over year in sales generated from aerospace, defence and marine market in the reported quarter.
Further, the company witnessed a decline of 14% in the industrial equipment sales from the year-ago quarter. Although the company performed sluggishly in North America and Europe, it delivered growth in China.
Moreover, delays in elective procedures due to ongoing pandemic led to year-over-year decline of 9% in medical sales. Additionally, energy sales fell 2% from the year-ago quarter due to sluggishness in North American region, which did offset growth in Europe and China.
Communications Solutions: This segment generated sales of $428 million (16.8% of net sales), improving 2.9% year over year. Although the company witnessed 11% decline in appliances, it witnessed year-over-year improvement of 13% in data centers, which remained a major positive.
Per management, gross margin came in 27.7%, contracting 500 basis points (bps) from the year-ago quarter.
We note that R&D expenses were $146 million, which declined7.6% year over year. Further, selling, general, and administrative expenses were $321 million, down 9.8% year over year. Further, acquisition and integration expenses totaled $8 million, declining11.1% from the year-ago quarter.
However, restructuring costs increased 46.3% from the year-ago quarter to $98 million in the reported quarter.
Consequently, adjusted operating margin came in at 9.4%, contracting from 17.6% in the prior-year quarter.
Balance Sheet & Cash Flow
As of Jun 26, 2020, TE Connectivity’s cash and cash equivalents were $474 million, lower than $796 million as of Mar 27, 2020.
Long-term debt was $3.4 billion, down from $3.7 billion in the previous quarter.
The company generated $380 million of cash from operations in the reported quarter, down from $481 million in the prior quarter.
Further, free cash flow of $280 million was generated in the reported quarter. Additionally, TE Connectivity paid out $241 million to shareholders during the reported quarter.
The company anticipates net sales to be up 10% sequentially in fourth-quarter fiscal 2020. Improving Transportation segment is likely to drive the top line.
How Have Estimates Been Moving Since Then?
It turns out, estimates review flatlined during the past month.
At this time, TE Connectivity has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
TE Connectivity has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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