It has been about a month since the last earnings report for TE Connectivity (TEL). Shares have lost about 13.2% in that time frame, underperforming 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 the most recent earnings report in order to get a better handle on the important catalysts.
TE Connectivity's Q1 Earnings & Revenues Beat Estimates
TE Connectivity reported first-quarter fiscal 2020 adjusted earnings of $1.21 per share, beating the Zacks Consensus Estimate by 6.1%. Notably, the figure came well above management’s guided range.
However, the bottom line declined 6.2% on a year-over-year basis and 9% sequentially.
Net sales in the reported quarter were $3.2 billion, which surpassed the Zacks Consensus Estimate by 1.2%. Further, the figure came within the company’s guided range. However, the figure declined 5.3% from the year-ago quarter and 4% from the prior quarter.
This can be attributed to weakness in the all the key end-markets, which impacted the performance of Transportation, Industrial and Communication segments during the reported quarter. Moreover, declining orders on year-over-year basis was an overhang.
Notably, the company’s total orders came in at $3.2 billion during the reported quarter.
Nevertheless, TE Connectivity witnessed 1% improvement in the total orders from the prior quarter. This indicates that the end markets are stabilizing.
Further, continued solid execution of the company’s strategic plans especially cost reduction initiatives in order to generate strong cash flow, 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 sales worth $1.87 billion (58.9% of net sales) in the reported quarter, down 5.9% 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 4% in automotive sales. Further, sluggishness in commercial transportation and industrial markets led to year-over-year decline of 7% in the company’s sensor business.
Additionally, sales in its commercial transportation business was down 13% from the year-ago quarter due to sluggish performance in North America and Europe. Nevertheless, the business witnessed strong momentum in China during the reported quarter.
Industrial Solutions: This segment generated sales of $927million (29.3% of net sales), which fell 0.1% year over year. This was primarily driven by inventory destocking, which led to year-over-year decline of 17% in the company’s industrial equipment business.
Nevertheless, TE Connectivity experienced solid momentum in aerospace, defense and marine field where it witnessed year-over-year growth of 8%. Further, it saw an improvement of 7% in medical year over year owing to interventional medical applications. Additionally, the company witnessed 10% year over year growth in energy, courtesy of investments in renewable energy.
Communications Solutions: This segment generated sales of $373 million (11.8% of net sales), declining 13.9% year over year. This can be attributed to inventory destocking, which resulted in a decline of 15% in data & devices and 13% in appliances solutions on a year-over-year basis.
Per the company, gross margin came in 32.5%, contracting 80 bps from the year-ago quarter.
We note that R&D expenses were $161 million, which remained flat year over year. Further, selling, general, and administrative expenses came in at $367 million, down 5.6% year over year. Further, restructuring costs decreased 68% from the year-ago quarter to $24 million in the reported quarter.
However, acquisition and integration expenses totaled $7 million, up 40% from the year-ago quarter.
Consequently, adjusted operating margin came in at 15.8%, contracting 110 bps from the prior-year quarter.
Balance Sheet & Cash Flow
As of Dec 27, 2019, TE Connectivity’s cash and cash equivalents of $742 million, lower than $927 million as of Sep 27, 2019.
Long-term debt was $3.41 billion, up from $3.39 billion in the previous quarter.
The company generated $411 million of cash from operation in the reported quarter, compared with $878 million in the previous quarter.
Further, free cash flow of $243 million was generated in the reported quarter. Additionally, TE Connectivity paid out $297 million to shareholders through share repurchases and dividend payments.
For fiscal second-quarter 2020, the company expects net sales in the range of $3.1 billion to $3.3 billion.
Adjusted earnings per share are projected in the band of $1.22-$1.28 for the fiscal second quarter.
For fiscal 2020, TE Connectivity has updated net sales guidance to $12.85 billion-$13.25 billion from $12.7 billion-$13.3 billion.
Further, adjusted earnings for fiscal 2020 are expected between $4.95 and $5.25 per share. The company has revised the lower end of the guided range upward from $4.95.
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 #2 (Buy). We expect an above average return from the stock in the next few months.
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