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TE Connectivity (TEL) Down 1.3% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for TE Connectivity (TEL). Shares have lost about 1.3% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is TE Connectivity due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

TE Connectivity's Q3 Earnings Beat, Revenues Lag Estimates

TE Connectivity delivered fiscal third-quarter 2019 adjusted earnings of $1.50 per share, beating the Zacks Consensus Estimate by 8 cents. The figure increased 5.6% year over year and came well ahead of management’s guided range of $1.41-$1.45.

Net sales in the reported quarter were $3.39 billion, which missed the Zacks Consensus Estimate of $3.42 billion. It also fell short of management’s guided range of $3.4 billion to $3.5 billion. Further, the figure decreased 5.4% from the year-ago quarter.

This can be attributed to weakness in the key end-markets. Further, decline in orders and sluggishness across Transportation and Communication segments of the company impacted the top line. Moreover, slowdown in the auto-production in China and broad inventory destocking by distribution partners impacted the results.

The company’s total orders declined 10% on a year-over-year basis in the second quarter.

However, the company benefited from solid momentum in the Industrial segment throughout the reported quarter.

Further, continued solid execution of the company’s strategic plans is likely to aid it in winning shareholders’ confidence.

Top-Line in Detail

TE Connectivity operates in three organized segments.

Transportation Solutions: The company generated $1.968 billion of sales (58.1% of net sales) in the reported quarter, down 6.8% on a year-over-year basis. This was owing to weakness in auto production worldwide. The company witnessed weak momentum across China, Europe and Americas. Further, the company’s commercial transportation exhibited sluggish performance. However, the sensor business performed well. Additionally, transportation segment’s decline was less than the magnitude of drop in the global auto production driven by to content growth in autonomous and electric vehicles.

Industrial Solutions: This segment yielded sales of $1,005 billion (29.6% of net sales), improving 1.7% from the prior-year quarter. The company’s growing traction in the aerospace, defense and medical fields drove the segment’s top line. Further, the aerospace, defense and marine business exhibited strong performance in the reported quarter. However, industrial equipment sales were sluggish.

Communications Solutions: This segment generated sales of $416 million (12.3% of net sales), decreasing 13.5% year over year. This was owing to broad-based weakness across all regions. Moreover, inventory destocking impacted this segment significantly since it is highly dependent on distribution channel.

Operating Details

Per the company, gross margin for the third quarter of 2019 came in 32.7%, contracting 40 bps from the year-ago quarter.

R&D expenses were $158 million, down 7.6% from the prior-year quarter. Further, selling, general, and administrative expenses came in at $356 million, down 9.6% year over year.

Adjusted operating margin came in at 17.6%, expanding 20 bps year over year.

Balance Sheet & Cash Flow

As of Jun 28, 2019, TE Connectivity’s cash and cash equivalents of $546 million, lower than $565 million as of Mar 29, 2019.

The company generated free cash flow of $515 million in the reported quarter, up from $344 million in the prior quarter. Further, TE Connectivity paid out $307 million to shareholders through share repurchases and dividend payments.

Guidance

For fiscal fourth-quarter 2019, the company expects net sales in the range of $3.2 billion and $3.3 billion.

Adjusted earnings per share are projected in the band of $1.27-$1.33 for fiscal fourth-quarter.

Additionally, for fiscal 2019, TE Connectivity revised guidance for net sales downward from $13.55-$13.75 billion to $13.35-$13.45.

The company revised the guided range for adjusted earnings from $5.55-$5.65 to $5.47-$5.53 per share for fiscal 2019.

To Conclude

TE Connectivity’s Industrial Solutions segment is expected to be down by low-single digit in fourth-quarter 2019 owing to inventory destocking, which does not bode well for industrial equipment business.

Further, Communications Solutions segment is expected to be down by in high teens primarily on account of inventory destocking.

Moreover, Transportation Solutions segment is anticipated to be down mid-single digit. The segment is expected to hurt by sluggish global auto-production and supply chain adjustments.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -10.2% due to these changes.

VGM Scores

At this time, TE Connectivity has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise TE Connectivity has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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