Morningstar | Channel and China Chop TE's 4Q Outlook; Long-Term Thesis and FVE Unchanged
TE Connectivity's third-quarter results were mixed, as revenue fell shy of guidance and our expectations and adjusted earnings were above the high end of management's prior forecast. In addition, TE's outlook for the fiscal fourth quarter indicated additional top-line headwinds due to a combination of automotive weakness, particularly in China, and inventory destocking from the firm's distributor partners. However, the durability of profitability in the third quarter after previous cost initiatives was encouraging and mitigates our concerns about temporary issues with revenue growth over the next few quarters. As a result, we are maintaining our $87 fair value estimate and narrow-moat rating for the component company. Shares remain in the 3-star range and we would advise investors to wait for a pullback.Revenue in the third quarter was down nearly 1% sequentially, and over 5% year over year, to $3.4 billion. Sluggish demand and inventory adjustments hit TE's communication solutions segment hardest, with sales declining 13% year over year. Equipment in the industrial solutions segment was similarly affected but stellar growth in aerospace and defense markets, which logged a third straight quarter of low-double-digit growth on a year-over-year basis, largely offset this. Automotive, on the other hand, struggled. Automotive sales declined 8% year over year with China auto production largely to blame. However, management reiterated its long-term expectation for automotive content growth to continue in the 4%-6% range.
Guidance for the upcoming quarter assumes revenue declining 7% year over year to $3.25 billion with adjusted earnings per share declining 4.5% over the same period to $1.29 at the midpoint. The revenue declines are expected to be a result of continued auto weakness in China, amid slowing economic conditions and trade-related uncertainty, as well as inventory destocking by distributors.
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