Localized Manufacturing And AI Will Spur Auto And Utility Success

Key Takeaways

• Localizing manufacturing enhances operational efficiency, reducing tariff exposure and potentially improving net margins.
  
• Strategic acquisitions and a focus on emerging technologies and markets drive revenue growth and shareholder returns.
  
• Geopolitical tensions and tariffs threaten TE Connectivity's revenue, with risks in Western auto markets, uneven global auto growth, and challenges in the Medical business.

Catalysts

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

• TE Connectivity's strategy of localizing manufacturing (over 70%) near their customers demonstrates operational efficiency and reduced susceptibility to tariffs, potentially improving net margins by minimizing cost impacts from trade policy changes.
  
• The acquisition of Richards in the Industrial segment is expected to open new opportunities in the North American utility market, potentially increasing revenues through expanding their product offering in the energy sector.
  
• Growth in industrial solutions, particularly through exposure to artificial intelligence (AI) applications, suggests an increase in revenue, as TE Connectivity expects AI-related revenue to exceed $700 million in fiscal 2025 due to strong program ramps.
  
• TE Connectivity's new focus on electronification and data connectivity in vehicles, as well as strong positioning in the growing Asia auto market, indicates potential for revenue growth, even amidst regional declines in Western markets.
  
• Sustained operational improvements in their cash generation model and strategic acquisitions allow TE Connectivity to reinvest in growth opportunities and return capital to shareholders, which could enhance earnings per share (EPS) through strategic capital deployment and buybacks.

TE Connectivity Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TE Connectivity's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.7% today to 14.6% in 3 years time.
• Analysts expect earnings to reach $2.8 billion (and earnings per share of $10.05) by about May 2028, up from $1.4 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 19.6x on those 2028 earnings, down from 34.6x today. This future PE is lower than the current PE for the US Electronic industry at 21.7x.
• Analysts expect the number of shares outstanding to decline by 3.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.47%, as per the Simply Wall St company report.

TE Connectivity Future Earnings Per Share Growth

Risks

• The impact of recent tariffs has been pronounced in the Industrial segment, potentially leading to increased costs of approximately 3% of sales, despite mitigation efforts. This could adversely affect revenue if price actions do not fully recover these costs.
  
• Weakness in Western auto markets, particularly in Europe and North America, where production is down, may lead to reduced sales and slower revenue growth in the Transportation segment.
  
• The global auto market is uneven, with growth concentrated in Asia outperforming a general decline in Western regions. This regional disparity may affect overall revenue growth and net margins due to differences in market size and content per vehicle.
  
• The Medical business experienced a 14% decline due to inventory normalization, which could suggest potential risks to revenue if demand does not stabilize or grow as expected.
  
• The geopolitical landscape and anti-American sentiment create risks for TE Connectivity, as certain regions may favor local suppliers over US-based companies, potentially impacting revenues and market share.

Valuation

• The analysts have a consensus price target of $162.062 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 $193.0, and the most bearish reporting a price target of just $140.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $19.4 billion, earnings will come to $2.8 billion, and it would be trading on a PE ratio of 19.6x, assuming you use a discount rate of 8.5%.
• Given the current share price of $162.39, the analyst price target of $162.06 is 0.2% lower. 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.