AI And EV Focus May Strengthen Market Position Despite Economic Risks

Key Takeaways

• TE Connectivity's focus on innovation and operational efficiency is anticipated to drive revenue growth and boost net margins.
  
• Strategic capital allocation and strong positioning in hybrid and EV markets, especially in Asia, are expected to enhance market reach and earnings.
  
• Economic volatility, currency headwinds, and sector weaknesses could impact TE Connectivity's revenue growth and margins, particularly in Transportation and Industrial Solutions segments.

Catalysts

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

• TE Connectivity's focus on innovation, such as supporting next-generation architectures and AI applications, is expected to drive future revenue growth and positively impact earnings.
  
• Efforts to improve operational efficiency are anticipated to further expand adjusted margins, thereby enhancing net margins and operating income.
  
• The company's global manufacturing strategy, including localization and preparation for tariff cycles, is likely to reduce costs, supporting sustained net margin growth.
  
• Strong cash generation and strategic capital allocation, including bolt-on M&A opportunities, provide potential for revenue expansion and earnings growth through enhanced business capabilities and market reach.
  
• Expected growth in hybrid and EV production, particularly in Asia, where TE Connectivity is well-positioned, may increase the company's market share, driving revenue and potentially increasing earnings.

TE Connectivity Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TE Connectivity's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.1% today to 15.1% in 3 years time.
• Analysts expect earnings to reach $2.8 billion (and earnings per share of $9.71) by about January 2028, up from $1.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.2x on those 2028 earnings, down from 23.1x today. This future PE is lower than the current PE for the US Electronic industry at 25.5x.
• Analysts expect the number of shares outstanding to decline by 0.87% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.12%, as per the Simply Wall St company report.

TE Connectivity Future Earnings Per Share Growth

Risks

• Global economic uncertainty presents risks, creating volatility that may affect TE Connectivity’s future revenue projections and business outlook.
  
• The impact of a stronger U.S. dollar introduces unfavorable currency exchange headwinds, forecasted to reduce revenue by over $300 million for fiscal 2025, thus potentially squeezing net margins.
  
• Declines in auto production in key markets, such as Europe and North America, paired with softness in commercial transportation and sensor markets, could dampen revenue growth prospects in the Transportation Solutions segment.
  
• Weakness in factory automation in Europe and broader industrial markets may impact revenue and growth outlook in the Industrial Solutions segment, specifically related to automation and industrial equipment.
  
• Implementing tariffs could present operational and cost challenges, possibly affecting earnings and margins despite prior handling experience with tariffs by the company.

Valuation

• The analysts have a consensus price target of $170.73 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 2028, revenues will be $18.7 billion, earnings will come to $2.8 billion, and it would be trading on a PE ratio of 22.2x, assuming you use a discount rate of 8.1%.
• Given the current share price of $148.45, the analyst's price target of $170.73 is 13.0% higher.
• 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.