EUR 850.00 For Business Accounts Only

Morningstar | Growing Connectivity Keeps TE Going; Upgraded to Narrow Moat; Increasing FVE to $97

After taking a fresh look at interconnect and sensor manufacturer, TE Connectivity, we are upgrading the company to a narrow economic moat, maintaining the stable moat trend rating, and increasing our fair value estimate to $97 per share from $89. We note that the shares are currently trading at a slight discount.

We foresee steady growth and profitability for TE Connectivity over the next decade, thanks to secular and technological trends driving increased connectivity, emissions, and efficiency standards. The company is a leading supplier of interconnect and sensors products in harsh environments for the broad industrial sector, with significant market share in key components for automotive, commercial transportation, industrial equipment, and aerospace markets. We also believe that while TE Connectivity’s competitive position is stable, customers face significant switching costs in attempting to go for competitors' sensor and interconnect products. Thus, we are raising TE Connectivity’s moat rating to narrow.

We believe the switching costs and global technological tailwinds will enable the firm to retain existing customer and expand market share in several applications in major end-markets, helping the firm generate returns above the cost of capital over the next decade. TE Connectivity’s near-term growth is a function of increased content in the global automotive market, in our view. Organic sales should keep up with their respective geographic markets, but content gains in automotive and commercial transport markets should allow the firm to outpace global production growth. These factors also potentially raise switching costs as well as insulate revenue and profits from the worst of the industrial market’s cyclical downturns.

Safety and emissions regulations have already helped drive growth, and we expect pending policies in China and Europe will keep TE Connectivity in pole position to benefit. Longer term, the trend toward electrification and autonomous vehicles should open up new opportunities for TE Connectivity to produce integrated content for a variety of applications. Despite the significant competition in TE Connectivity’s end markets, the content growth story and the firm’s switching costs should result in mid-single-digit revenue growth and increased profitability over our explicit forecast.