Lower Revenues And Shrinking Margins Threaten Industrial Expansion Amid Global Headwinds

Key Takeaways

• Reorganization into a new structure may create short-term operational inefficiencies and impact net margins.
  
• Investment in Asian operations could raise costs, potentially affecting margins despite growth in EVs and AI sectors.
  
• Strategic investments in key markets, strong financial health, and focus on shareholder value position TE Connectivity for revenue growth despite market volatility.

Catalysts

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

• The reorganization into a new 2-segment structure might create integration challenges and operational inefficiencies in the short term, potentially impacting net margins.
  
• The anticipated decline in global auto production, particularly in the West, could lead to lower revenues in the Transportation segment.
  
• Continued investment in expanding Asian operations and engineering capabilities could increase operational costs, potentially compressing margins despite expectations of fueling growth in EVs and AI sectors.
  
• Weakness in the broader industrial market, particularly in factory automation in Europe, could hinder revenue growth for the Industrial Solutions segment in the near term.
  
• Currency exchange headwinds and a higher effective tax rate due to new tax regulations could negatively affect net earnings despite operational performance improvements.

TE Connectivity Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TE Connectivity's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 20.2% today to 15.3% in 3 years time.
• Analysts expect earnings to reach $2.8 billion (and earnings per share of $9.46) by about November 2027, down from $3.2 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 22.3x on those 2027 earnings, up from 14.7x today. This future PE is lower than the current PE for the US Electronic industry at 24.0x.
• Analysts expect the number of shares outstanding to decline by 0.41% 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

• TE Connectivity's investments in engineering skills, technology, and operations indicate confidence in supporting growth in key markets like AI and EV, potentially leading to revenue and EPS expansion.
  
• The company's strategic positioning aligns with secular trends, such as electrification, data connectivity in vehicles, renewable energy, and AI, which could bolster revenue despite market volatility.
  
• Record levels in operating margins, earnings per share, and free cash flow for fiscal 2024 reflect strong financial health, suggesting resilience in maintaining net margins.
  
• TE Connectivity's share repurchase program increase and robust cash flow generation model demonstrate a focus on maintaining shareholder value, potentially stabilizing earnings.
  
• TE's ability to outperform market growth in critical regions such as Asia, particularly in electric vehicles, underscores a strong revenue growth potential relative to market declines.

Valuation

• The analysts have a consensus price target of $167.07 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 $137.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $18.6 billion, earnings will come to $2.8 billion, and it would be trading on a PE ratio of 22.3x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $154.74, the analyst's price target of $167.07 is 7.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.