TE Connectivity (TEL) Q3 Earnings Top, Revenues Lag Estimates

TE Connectivity Ltd. TEL delivered fiscal third-quarter 2019 adjusted earnings of $1.50 per share, beating the Zacks Consensus Estimate by 8 cents. The figure increased 5.6% year over year and came well ahead of management’s guided range of $1.41-$1.45.

Net sales in the reported quarter were $3.39 billion, which missed the Zacks Consensus Estimate of $3.42 billion. It also fell short of management’s guided range of $3.4 billion to $3.5 billion. Further, the figure decreased 5.4% from the year-ago quarter.

This can be attributed to weakness in the key end-markets. Further, decline in orders and sluggishness across Transportation and Communication segments of the company impacted the top line. Moreover, slowdown in the auto-production in China and broad inventory destocking by distribution partners impacted the results.

The company’s total orders declined 10% on a year-over-year basis in the second quarter.

However, the company benefited from solid momentum in the Industrial segment throughout the reported quarter.

Coming to the price performance, TE Connectivity has returned 19.8% on a year-to-date basis, underperforming the industry’s rally of 25.5%.

Nevertheless, continued solid execution of the company’s strategic plans is likely to aid it in winning shareholders’ confidence.

Top-Line in Detail

TE Connectivity operates in three organized segments.

Transportation Solutions: The company generated $1.968 billion of sales (58.1% of net sales) in the reported quarter, down 6.8% on a year-over-year basis. This was owing to weakness in auto production worldwide. The company witnessed weak momentum across China, Europe and Americas. Further, the company’s commercial transportation exhibited sluggish performance. However, the sensor business performed well. Additionally, transportation segment’s decline was less than the magnitude of drop in the global auto production driven by to content growth in autonomous and electric vehicles.

Industrial Solutions: This segment yielded sales of $1,005 billion (29.6% of net sales), improving 1.7% from the prior-year quarter. The company’s growing traction in the aerospace, defense and medical fields drove the segment’s top line. Further, the aerospace, defense and marine business exhibited strong performance in the reported quarter. However, industrial equipment sales were sluggish.

Communications Solutions: This segment generated sales of $416 million (12.3% of net sales), decreasing 13.5% year over year. This was owing to broad-based weakness across all regions. Moreover, inventory destocking impacted this segment significantly since it is highly dependent on distribution channel.

TE Connectivity Ltd. Price, Consensus and EPS Surprise

 

TE Connectivity Ltd. Price, Consensus and EPS Surprise

TE Connectivity Ltd. price-consensus-eps-surprise-chart | TE Connectivity Ltd. Quote

Operating Details

Per the company, gross margin for the third quarter of 2019 came in 32.7%, contracting 40 bps from the year-ago quarter.

R&D expenses were $158 million, down 7.6% from the prior-year quarter. Further, selling, general, and administrative expenses came in at $356 million, down 9.6% year over year.

Adjusted operating margin came in at 17.6%, expanding 20 bps year over year.

Balance Sheet & Cash Flow

As of Jun 28, 2019, TE Connectivity’s cash and cash equivalents of $546 million, lower than $565 million as of Mar 29, 2019.

The company generated free cash flow of $515 million in the reported quarter, up from $344 million in the prior quarter. Further, TE Connectivity paid out $307 million to shareholders through share repurchases and dividend payments.

Guidance

For fiscal fourth-quarter 2019, the company expects net sales in the range of $3.2 billion and $3.3 billion. The Zacks Consensus Estimate for sales is pegged at $3.46 billion.

Adjusted earnings per share are projected in the band of $1.27-$1.33 for fiscal fourth quarter. The Zacks Consensus Estimate for earnings is pegged at $1.45 per share.

Additionally, for fiscal 2019, TE Connectivity revised guidance for net sales downward from $13.55-$13.75 billion to $13.35-$13.45. The Zacks Consensus Estimate for earnings for 2019 is pegged at $13.66 billion.

The company revised the guided range for adjusted earnings from $5.55-$5.65 to $5.47-$5.53 per share for fiscal 2019. The Zacks Consensus Estimate for earnings is pegged at $5.59 per share.

To Conclude

TE Connectivity’s Industrial Solutions segment is expected to be down by low-single digit in fourth-quarter 2019 owing to inventory destocking, which does not bode well for industrial equipment business.

Further, Communications Solutions segment is expected to be down by in high teens primarily on account of inventory destocking.

Moreover, Transportation Solutions segment is anticipated to be down mid-single digit. The segment is expected to hurt by sluggish global auto-production and supply chain adjustments.

Zacks Rank & Stocks to Consider

TE Connectivity carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Alteryx, Inc. AYX, Lattice Semiconductor Corporation LSCC and Mettler-Toledo International MTD. While Alteryx and Lattice Semiconductor sport a Zacks Rank #1 (Strong Buy), Mettler-Toledo carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Alteryx, Lattice Semiconductor and Mettler-Toledo is currently pegged at 13.66%, 12.5% and 13.8%, respectively.

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