EUR 850.00 For Business Accounts Only

Morningstar | TE Delivers Despite SubCom Weakness: Maintain $89 FVE

TE Connectivity reported third-quarter results that exceeded guidance on both revenue and earnings, while providing fourth-quarter guidance that marginally improved on prior full-year guidance. Aside from continued poor performance in the subsea communications market, TE’s various end markets have continued to deliver, keeping the firm on track toward double-digit annual sales growth for the first time since 2015. The firm is currently sailing strongly on the secular tailwinds of increased content in the major end markets it serves, though we expect this to tail off longer term. We will maintain our current fair value estimate of $89 and no-moat rating for TE Connectivity and note that shares are currently trading solidly in 3-star territory.

Quarterly revenue increased nearly 12% year over year, while flat sequentially, to $3.76 billion. The communication solutions segment struggled, growing 4% versus the preceding quarter but declining 5% over the prior-year period. While the data and appliances subsegments grew in the low teens, SubCom declined by 32% due to continued delays in the expected transpacific project between Asia and the United States, which more than offset the performance in the other communication markets. Transportation solutions segment revenue kept pace with the second quarter while posting 20% growth year over year. Our expectations for the segment remain highly positive. As design wins continue across both automotive and commercial transportation, TE is setting up a pipeline of revenue opportunities that should deliver steady mid-single-digit growth in the next few years.

Adjusted gross margin declined sequentially by 90 basis points to 32.4% due to the subsea communications business. While indicating the impact of that market, the stability of the adjusted operating margin, dropping only 30 basis points to 16.7%, signals the strong performance within the transportation and industrial segments.

The revenue outlook for the fourth quarter is for sales of $3.64 billion at the midpoint of guidance, implying year-over-year growth of 5%. Adjusted earnings per share is expected at $1.31-$1.33, which would represent a 4% increase year over year. TE’s management also provided an abbreviated outlook on the impact of tariffs. Similar to other firms in this space, management has worked closely with customers to leverage the firm’s global footprint and optimize supply chains in an effort to mitigate the impact of new trade policies while also indicating that it may be necessary to impose surcharges on some products. TE Connectivity’s leadership will provide further details when they release fiscal 2019 guidance next quarter.