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Why Is TE Connectivity (TEL) Down 9.2% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for TE Connectivity (TEL). Shares have lost about 9.2% 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 Beats on Q2 Earnings & Revenues

TE Connectivity Ltd. delivered fiscal second-quarter 2019 adjusted earnings of $1.42 per share, beating the Zacks Consensus Estimate by 15 cents. The figure came well ahead of management’s guided range of $1.13-$1.17 and in line on a year-over-year basis.

Net sales in the reported quarter were $3.412 billion which also outpaced the Zacks Consensus Estimate of $3.362 billion and exceeded the company’s guided range of $3.3 billion and $3.4 billion. However, the figure decreased 4.2% from the year-ago quarter.

This can be attributed to sluggishness in the orders in Transportation and Communication segments of the company. Moreover, foreign exchange fluctuations impacted the top-line growth by $150 million.

The company’s total orders went down by 5.4% to $3.5 billion, owing to weakness in Europe.

Nevertheless, the company witnessed stabilization in its orders from China. Notably, the company was witnessing decline in its orders in the country since the prior-year quarter due to macro-economic headwinds. Orders in China have improved 9% on a sequential basis.

The company also benefited from its solid momentum in the Industrial segment throughout the reported quarter.

We believe 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 the following three organized segments.

Transportation Solutions: The company generated $1.971 billion of sales (56.2% of net sales) in the reported quarter, down 7.6% on a year-over-year basis. This was owing to weakness in auto production worldwide. Further, orders within this segment were down 4% due to negative impact of European headwinds. However, the segment’s decline was less than the magnitude of drop in the global auto production owing to content growth in autonomous and electric vehicles. Further, its continued design wins remained positive.

Industrial Solutions: This segment yielded sales of $1,007 billion (26.2% of net sales), rising 3.6% from the prior-year quarter. The company’s growing traction in the aerospace, defense and medical fields drove its top line within the segment. Further, industrial equipment and energy businesses of the company performed well which further contributed to sales in this segment. Orders were up 3% during the reported quarter.

Communications Solutions: This segment generated sales of $434 million (17.6% of net sales), decreasing 4.8% year over year. This was owing to softness in Asia which affected the company’s sales in the data and device market. Moreover, weakness in Europe impacted client business within the segment during the reported quarter. However, TE Connectivity witnessed growth in North America with communication solutions.

Operating Details

Per the company, gross margin for fiscal second quarter of 2019 came in 32.8%, contracting 120 bps from the year-ago quarter. This was due to cost of goods sold as a percentage of net sales, which expanded 130 bps.

R&D expenses were $166 million, down 4% from the prior-year quarter. Further, selling, general, and administrative expenses came in at $373 million, down 8.8% year over year.

Adjusted operating margin came in at 17%, contracting 70 bps year over year. This was due to contraction of 250 bps year over year in adjusted operating margin in Transportation Solutions segment.

Balance Sheet & Cash Flow

As of Mar 29, 2019, TE Connectivity’s cash and cash equivalents of $565 million, higher than $505 million as of Dec 28, 2018.

The company generated free cash flow of $344 million in the reported quarter, up from $69 million in the prior quarter. Further, TE Connectivity paid back $338 million to its shareholders through share repurchases and dividend payments.

Guidance

For the fiscal third quarter of 2019, the company expects net sales in the range of $3.4 billion and $3.5 billion.

Adjusted earnings per share are projected in the band of $1.41-$1.45.

Additionally, for fiscal 2019, TE Connectivity raised guidance for net sales from $13.45-$13.85 billion to $13.55-$13.75 billion.

The company also increased the guided range for adjusted earnings from $5.35-$5.55 to $5.55-$5.65 per share.

To Conclude

TE Connectivity anticipates currency headwinds to negatively impact its top and bottom line in third-quarter 2019.

However, the company raised fiscal 2019 earnings and sales guidance backed by strengthening performance of Industrial Solutions segment which is expected to be up by low-single digit, thanks to growing momentum across aerospace, defense and medical applications areas.

However, Communications Solutions segment is expected to be down by low-single digit owing to softness in Asia.

Meanwhile, Transportation Solutions segment is anticipated to remain flat. The segment is expected to benefit from growing adoption of sensors in industrial and auto applications. Further, Content growth in automobile production also remains a tailwind.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, TE Connectivity has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile 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.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise 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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