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Why Is TE Connectivity (TEL) Down 2% Since Last Earnings Report?

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It has been about a month since the last earnings report for TE Connectivity (TEL - Free Report) . Shares have lost about 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 Q4 Earnings Top Estimates, Revenues Up Y/Y

TE Connectivity delivered fourth-quarter fiscal 2018 adjusted earnings of $1.35 per share, beating the Zacks Consensus Estimate by 2 cents. The figure also grew 19.5% year over year and exceeded the projected range of $1.31-$1.33 per share.

Net sales in the quarter were up 1.5% year over year to $3.51 billion. Solid segmental performance, especially in the Industrial and Communications segments, drove top-line growth in the reported quarter. Additionally, organic growth in all the segments remained positive throughout the quarter.

However, the figure lagged the Zacks Consensus Estimate of $3.64 billion.

The company’s total orders grew 4% year over year but declined 8% sequentially.

TopLine in Detail

TE Connectivity operates in the following three organized segments.

Transportation Solutions: The company generated $2.01 billion of sales (57.3% of net sales) in the reported quarter, up 9.1% on a year-over-year basis. This was driven by solid organic growth of 8% within the segment’s businesses – automotive, commercial transportation and sensor. Further, orders also improved 4% organically. All these can primarily be attributed to robust performance of commercial transport, which increased 15% year over year. Additionally, strong presence in Americas and China, drove results. At present, China’s truck market accounts for 30% of TE Connectivity’s commercial transportation business.

Industrial Solutions: This segment recorded sales of $1.01 billion (28.9% of net sales) and witnessed another strong quarter, rising 6.3% from the prior-year quarter. The company witnessed organic growth of 6% in the reported quarter. Further, orders went up 3% organically. Strength in aerospace, defense and marine, as well as medical applications drove growth.

Communications Solutions: This segment generated sales of $483 million (13.8% of net sales), which increased 10.5% year over year and experienced organic growth of 12%. This was driven by strong growth in data and devices due to high-speed connectivity in data center applications and content growth from electronification trends. Moreover, organic growth in orders received was4% from the year-ago quarter.

Operating Details

Gross margin for the fourth quarter of fiscal 2018 was 33.7%, which expanded 70 basis points (bps) from the year-ago quarter. Adjusted operating margin was 17%, up 110 bps year over year.

Moreover, R&D expenses were $171 million, up 10.3% from the prior-year quarter and selling, general, and administrative expenses were $414 million, up 4% year over year.

Notably, the company incurred acquisition charge of $5 million compared with $1 million in the year-ago quarter.

Balance Sheet & Cash Flow

As of Sep 28, 2018, TE Connectivity’s cash and cash equivalents of $848 million was less than $1,218 million as of Sep 29, 2017.

The company generated free cash flow of $922 million in the reported quarter, up 10% from the year-ago quarter. Further, TE Connectivity paid back $1.6 billion to its shareholders through share repurchases and dividend payments and used $153 million for acquisitions.

Guidance

For the fiscal first quarter of 2019, the company expects net sales in the range of $3.33 billion and $3.43 billion, reflecting growth of 3% at mid-point.

Adjusted earnings per share are projected in the band of $1.25-$1.29.

Additionally, for fiscal 2019, TE Connectivity anticipates net sales of$13.9 to $14.3 billion, projecting growth of 3% year over year at the mid-point.

The company anticipates adjusted EPS to be within $5.6-$5.8, indicating low-single digit earnings expansion.

To Conclude

TE Connectivity reported mixed fourth-quarter fiscal 2018 results, beating earnings estimates but missing the same for revenues. The company’s fiscal 2019 earnings guidance and sales forecast reflects slower growth in certain end market. Moreover, the company expects revenues to decline in the first and fourth quarters of 2019.

The company’s strong efforts toward business development will continue to benefit segmental performance.

The Transportation Solutions segment is anticipated to witness growth at low single-digits organically, owing to global decline in auto production, primarily in Europe and China.

The Industrial Solutions segment is also poised to grow in mid-single digits with growth in aerospace, defense and medical.

Communications Solutions segment is also expected to grow in mid-single digits. The growth will primarily be backed by strength in data and devices unit.

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 -8.44% due to these changes.

VGM Scores

At this time, TE Connectivity has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second 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 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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