EUR 850.00 For Business Accounts Only

Morningstar | TE Announces Solid Quarter but Headwinds Remain; Maintaining $87 Fair Value Estimate

TE Connectivity’s second-quarter fiscal 2019 results were solid, with both revenue and adjusted earnings per share exceeding the top of management’s prior guidance. While automotive production and global macro concerns were headwinds to the financial results, as expected, a combination of transportation content growth, strong performance from medical equipment, and aerospace and defense sales mitigated the revenue declines. Further, the firm realized strong operating performance in both communications and industrials segments due to ongoing optimization and rationalization. Despite the rosier picture, we do not think TE is quite out of the storm. Sales of industrial equipment in China and Europe remained weak, and management expects automotive unit declines to continue in the upcoming quarter. We are maintaining our current fair value estimate of $87 per share. Shares traded up more than 5% on account of the positive news, and we do not see any margin of safety at current prices. However, should a gap materialize, we would be avid buyers of the narrow-moat name.

Second-quarter revenue was $3.4 billion, which represented a 4% decline from a year ago. The slowing global automotive production environment caused transportation sales to decline by nearly 8% year over year. However, on an organic basis, content growth helped to mitigate this impact, as we have been expecting, with automotive sales declining just 5% organically versus the unit production declines of 8%. Similarly, commercial transportation--which includes most other things on four wheels that are not light vehicles--grew 2% organically versus broader market losses of 3%. In industrial, aerospace, defense, and medical equipment were the standout performers with the former end-market growing 11% year over year. Medical equipment, which is reported as part of the industrial equipment sub-segment, increased nearly 12% year over year but this was largely offset by declines in factory automation sales.

Communications-related sales were also down with data and devices sales declining 3% year over year and appliances declining nearly 8% due to poor performance in both of the Asian and European markets. While sales were weak for the segment, adjusted operating margin was very strong, expanding 260 basis year over year to 18% due to ongoing cost control initiatives. In general, we believe the firm has shown solid operational performance, with margins expanding in both communications and industrials segments. Management announced further cost-reduction efforts for the transportation segment, where it expects to incur $250 million of restructuring charges for the fiscal year as it takes advantage of the slower automotive unit production rate to optimize its footprint.