TE Connectivity Ltd. TEL scored the fourth consecutive earnings beat as it reported fourth-quarter fiscal 2016 adjusted earnings of $1.27 per share, beating the Zacks Consensus Estimate of $1.19 by 6.7%. The bottom line fared phenomenally in year-over-year comparison, surging 41% from the prior-year tally of 90 cents.
The impressive earnings were driven by robust growth in harsh environment and SubCom businesses. The company’s continued productivity improvements also reflected in the quarter’s earnings.
On GAAP basis, the company posted earnings from continuing operations of $1.22 per share in the quarter, up over 258% from 34 cents reported in the prior-year quarter.
For fiscal 2016, TE Connectivity’s adjusted earnings rose 13.3% year over year to $4.08 per share. The strong growth was supported by consistent excellent performance in the Transportation Solutions segment, along with solid execution in Industrial Solutions and Communications Solutions segments in the second half of the fiscal year.
Inside the Headlines
Net sales in the quarter grew 11.7% year over year at $3,332 million. However, the figure slightly lagged the Zacks Consensus Estimate of $3,346 million.
The top line benefited from excellent traction in the SubCom business as well as most of the company’s harsh environment businesses, including Automotive, Defense, Aerospace, Commercial Transportation, Energy and Appliances. However, prolonged softness in industrial markets along with unfavorable macroeconomic conditions like volatile oil and gas prices and slowdown in China, restricted growth.
For fiscal 2016, TE Connectivity’s sales were relatively flat year over year at $12.2 billion, as the company continued to grapple with persistent difficult conditions in key served markets, despite robust growth in many segments,.
Segmental Performance
Transportation Solutions revenues came in at $1,736 million in the quarter, up 15.1% on a year-over-year basis. Orders in the transportation segment came in at $1,854 million compared with the year-ago tally of $1,480 million. Though automotive organic sales growth in Europe and EMEA regions acted as tailwinds, weakness in industrial markets offset these improvements to some extent.
Industrial Solutions revenues had another good quarter, rising 16% year over year to $919 million in the quarter under review. Orders in this quarter rose 23.3% to $888 million. Growth was driven by solid performance from Aerospace and Defense business, while the recently acquired Creganna also lent strength to the segment’s top line. However, weakness in oil and gas markets and industrial equipment hurt growth to some extent.
Communications Solutions continued to show weakness as revenues inched down 1% year over year to $677 million. Orders were almost flat year over year at $447 million. The lackluster performance of the communications business was largely on account of product exits and Circuit Protection divestiture. Strong performance of Appliances business in Asia offset the decline to some extent.
The company’s adjusted operating margin for the quarter expanded 10 basis points from the year-ago quarter to 16.5%.
Liquidity & Cash Flow
TE Connectivity exited the quarter with cash and cash equivalents of $647 million, down from $3,329 million a year back.
The company generated free cash flow of $594 million in the quarter, up from $389 million in the prior-year quarter.
Share Repurchase Program/Dividend
During fiscal 2016, the company returned $3.1 billion to shareholders through share buybacks and dividends.
Other Developments
The quarter witnessed TE Connectivity fortify its portfolio through the acquisition of Jaquet Technology Group, which makes innovative speed sensors for the auto, rail and power markets. This expands the company’s scope of engineering and manufacturing expertise for sensor technology and adds to its automotive and industrial and commercial transportation portfolio.
Last quarter, TE Connectivity concluded the buyout of healthcare device company – Creganna Medical Group – for $895 million, in a bid to expand and emerge as the industry leader in high-growth harsh environment applications.
This acquisition will enable TE Connectivity to double its medical business revenues to approximately $500 million and cement its position in the high-growth minimally invasive medical device market. The company expects the deal to be accretive to the extent of $0.03 to adjusted earnings in the first full fiscal, while boosting interventional revenues by over $300 million.
TE Connectivity also acquired Intercontec Group — a leading maker of high-quality industrial metric circular connectors. The deal will further boost its position in harsh connectivity applications for the industrial market.
Outlook
TE Connectivity projects first-quarter fiscal 2017 adjusted earnings per share in the range of $0.98–$1.02 and revenues between $2.95 and $3.05 billion (which reflects a growth of 6% year over year at mid-point). The adjusted earnings and revenue figures incorporate the impact of Jaquet and Creganna acquisitions.
For fiscal 2017, the company expects adjusted earnings per share in the range of $4.19–$4.49 and revenues in the band of $12.3–$12.9 billion.
TE CONNECT-LTD Price, Consensus and EPS Surprise
Conclusion
The company is currently experiencing a steady recovery in the automotive market and anticipates a rebound in its commercial transportation business in the forthcoming quarters, both of which hold immense potential. The company expects industrial orders to gain further traction, which is a sign of stabilization in the sector. However, it continues to be bothered by the weakness in Chinese markets and foreign exchange volatility remains a risk.
Going forward, TE Connectivity believes that the acquisition of Creganna and Intercontec Group will further bolster its strong foothold in the harsh environment portfolio. Interventional medical applications business is also witnessing strong momentum.
The company has been undergoing restructuring in order to enhance its focus on the lucrative connectivity and sensor markets as well. These strategic steps are beginning to gain momentum and will likely drive growth in the coming quarters.
In addition, though the exit of the Circuit Protection business may have affected financials in the short run, we believe that the company will now be able to channel its resources to more productive areas in the future, thereby augmenting long-term growth.
TE Connectivity currently carries a Zacks Rank #4 (Sell).
Stocks to Consider
Some better-ranked stocks in the same space includeBallard Power Systems Inc. BLDP, AU Optronics Corp. AUO and TTM Technologies Inc. TTMI, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Ballard Power Systems has a robust earnings beat history, having surpassed estimates thrice in the trailing four quarters, for an average positive earnings surprise of 12.5%.
AU Optronics has managed to achieve an average positive earnings surprise of 16.7% over the trailing four quarters, thanks to a massive beat last quarter.
TTM Technologies has registered a remarkable positive average surprise of over 29% over the four trailing quarters, driven by three strong consecutive beats.
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