It has been about a month since the last earnings report for TE Connectivity (TEL). Shares have lost about 0.4% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is TE Connectivity due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
TE Connectivity Q1 Earnings Beat Estimates, Sales Fall Y/Y
TE Connectivity reported first-quarter fiscal 2024 adjusted earnings of $1.84 per share, which surpassed the Zacks Consensus Estimate by 6.98% and jumped 20.3% year over year.
The year-over-year growth was driven by strong margin expansion.
Net sales in the reported quarter were $3.83 billion, which missed the consensus mark by 1.44%. The figure was flat on a reported basis but declined 1% organically on a year-over-year basis.
Orders were $3.8 billion in the reported quarter, up 4% year over year, with Transporation and Communications increasing 4% and 3%, respectively. The industrial segment witnessed 6% sequential growth.
In the reported quarter, auto production was slightly more than 22 million units. It witnessed stronger production in China that offset some of the weakness in Europe and North America.
Top-Line Details
Transportation solutions segment generated revenues of $2.37 billion, which accounted for 61.9% of net sales. The figure increased 5% year over year but lagged the Zacks Consensus Estimate by 1.07%.
The company witnessed 8% growth in automotive sales. Organically, auto sales increased 8%, with 13% growth in Asia and 7% growth in Europe.
Sensor sales were down 9% year over year. Commercial transportation sales inched up 1% year over year.
TEL’s initiatives to exit lower-margin and lower-growth products negatively impacted sensor sales along with weakness in sensor applications and industrial markets.
Industrial solutions segment generated revenues of $1.03 billion, which accounted for 26.8% of net sales and lagged the Zacks Consensus Estimate by 3.73%. The figure declined 3.3% year over year.
Industrial equipment sales declined 36% year over year, while Aerospace, defense and marine increased 13%. Energy and Medical increased 1% and 16%, respectively.
The Communications solutions segment generated revenues of $433 million, which accounted for 11.3% of net sales. The figure declined 17% year over year but beat the consensus mark by 0.09%.
The year-over-year decline was attributed to broad market weakness. Data and device sales decreased 15% and appliance sales fell 20% year over year.
Operating Details
In first-quarter fiscal 2024, GAAP gross margin expanded 370 basis points (bps) year over year to 34.6%.
Selling, general and administrative expenses, as a percentage of revenues, increased 90 bps year over year to 11.1%. Research, development and engineering expenses, as a percentage of revenues, stayed flat at 4.5%.
GAAP operating margin expanded 520 bps year over year to 18.2%. Adjusted operating margin expanded 290 bps year over year to 19.1% in the reported quarter.
Balance Sheet & Cash Flow
As of Dec 29, 2023, cash and cash equivalents were $1.17 billion, up from $1.66 billion as of Sep 29, 2023.
Long-term debt was $3.59 billion as of Dec 29, 2023 compared with $3.529 billion as of Sep 29, 2023.
TE Connectivity generated $719 million in cash from operations in the reported quarter, down from $1.14 billion in the previous quarter.
TEL generated a free cash flow of $570 million in the reported quarter, down from $945 million reported in the previous quarter.
During the reported quarter, TE Connectivity returned $600 million to shareholders and spent $350 million on the Schaffner acquisition.
Guidance
For second-quarter fiscal 2024, TE Connectivity expects net sales of $3.95 billion, indicating 3% sequential growth. The Industrial segment is expected to grow, partially offset by a slight decline in the Transportation segment.
TEL expects an adjusted operating margin of 18.2% for the fiscal second quarter.
Adjusted earnings are projected at $1.82 per share, indicating growth of 10% year over year.
For the fiscal year, TEL expects steady performance from the Transportation segment, with global auto production expected to grow slightly. Strong China production and EV adoption are expected to offset weakness in Europe and North America.
The company expects global auto production to be roughly 21 million units per quarter through the fiscal year.
In the Industrial segment, TEL expects sequential growth in the Aerospace, defense and marine, as well as Energy and Medical sub-segments. The company is benefiting from its strong positioning in the renewable energy end-market in both solar and wind applications.
Commercial air sales continue to grow as production increases for both single and twin-aisle platforms. TEL’s medical business is benefiting from increases in interventional procedures.
The Industrial Equipment business is expected to suffer from continuing destocking initiatives by customers.
TE Connectivity expects to benefit from growing AI business in the Communications end-market in the second half of the fiscal year. It expects a $200 million contribution from the growing AI business.
In terms of margins, TEL expects the Transportation segment’s adjusted margins to be nearly 20% for the rest of the fiscal year.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates revision.
VGM Scores
At this time, TE Connectivity has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise TE Connectivity has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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