Harnessing Renewables, AI, And EV Trends To Propel Revenue And Margin Growth

Key Takeaways

• TE Connectivity's focus on renewable energy, AI, and electric vehicles is poised to drive future revenue growth.
  
• Strong margins and robust cash generation model enhance net margins and support shareholder returns and accretive acquisitions.
  
• TE Connectivity faces challenges from weak industrial markets, dynamic global conditions, and specific sector vulnerabilities, impacting future revenue and margins.

Catalysts

Manufactures and sells connectivity and sensor solutions in Europe, the Middle East, Africa, the Asia–Pacific, and the Americas.

• The strategic positioning of TE Connectivity around secular growth trends such as renewable energy adoption, artificial intelligence applications, and the increase in global hybrid and electric vehicle production is expected to impact future revenue growth positively.
  
• Operational levers that drive strong margin performance across economic cycles, as evidenced by the company's record adjusted operating margins and EPS, are anticipated to enhance net margins.
  
• A robust cash generation model that supports capital return to shareholders and bolsters bolt-on M&A activities could strengthen earnings through accretive acquisitions.
  
• Momentum in artificial intelligence design wins, particularly in the Communications segment, which is forecasted to double in revenue into 2025, is likely to drive significant revenue growth.
  
• The anticipated normalization of destocking in the industrial equipment sector and growth in commercial aerospace are expected to contribute to an improved growth trajectory, positively impacting both revenue and earnings.

Assumptions

• Analysts are assuming TE Connectivity's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 22.0% today to 14.9% in 3 years time.
• Analysts expect earnings to reach $2.7 billion (and earnings per share of $9.56) by about October 2027, down from $3.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.9x on those 2027 earnings, up from 12.9x today. This future PE is lower than the current PE for the US Electronic industry at 23.7x.
• Analysts expect the number of shares outstanding to decline by 3.19% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.13%, as per the Simply Wall St company report.

Risks

• Concerns about ongoing weakness in general industrial markets could lead to reduced demand for TE Connectivity's products, impacting future revenue growth.
  
• The global economic environment remains dynamic and uncertain, which could introduce volatility in TE Connectivity's markets and negatively affect its sales and earnings.
  
• Although TE Connectivity sees stability in its largest market, automotive, challenges such as supply chain disruptions or changes in consumer demand could impact revenue and net margins in this sector.
  
• Reliance on growth in specific segments like artificial intelligence applications and electric vehicles introduces concentration risk. Any slowdown in these areas could negatively affect overall revenue growth and profitability.
  
• Fluctuations in currency exchange rates and potential increases in tax rates were mentioned as headwinds, which could impact net margins and earnings.

Valuation

• The analysts have a consensus price target of $169.46 for TE Connectivity based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $190.0, and the most bearish reporting a price target of just $145.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $18.3 billion, earnings will come to $2.7 billion, and it would be trading on a PE ratio of 20.9x, assuming you use a discount rate of 7.1%.
• Given the current share price of $147.46, the analyst's price target of $169.46 is 13.0% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.