TE Connectivity, a leading supplier of auto, aerospace, and communication equipment, has reported better-than-expected quarterly earnings. Despite challenges in revenue growth, the company's profitability continues to improve.
Q1 2023 Results Exceed Expectations
On Wednesday morning, TE Connectivity released its results for the first quarter of the fiscal year, covering the last three months of 2023. The company achieved adjusted earnings per share of $1.84, marking a 20% increase from the previous year. Sales, however, experienced a slight decline of 0.3% compared to the year-ago period, amounting to $3.83 billion.
Surpassing Wall Street Estimates
TE Connectivity exceeded market expectations, as Wall Street analysts were anticipating adjusted EPS of $1.71 and sales of $3.87 billion. The company's performance surpassed these projections.
Focusing on Profit Margin Improvement
The impressive earnings growth was primarily driven by enhanced profit margins in the quarter, despite relatively flat revenue. TE Connectivity achieved an adjusted operating profit margin of 19.1% during the quarter, surpassing the consensus estimate of 17.4% - an increase of 2.9 percentage points compared to the same period a year ago.
Factors Influencing Margin Expansion
TE CEO Terrence Curtin attributes the margin expansion to various factors. The company's cost-cutting efforts, along with the lagged impact of price increases and economies of scale in its transportation segment, played significant roles in achieving this improvement.
Unpacking the Sales Challenge
While investors may be concerned about the lack of overall sales growth, there are other factors at play. Curtin explains that approximately $100 million in revenue per quarter is being affected by destocking. This accounts for a small percentage of sales and counterbalances some of the growth from aerospace and automotive end markets. Medical and energy customers, however, continue to perform well.
TE Connectivity's ability to outperform market expectations in terms of earnings highlights its commitment to enhancing profitability, even in the face of challenges in revenue growth. The company's strategic cost-cutting efforts and other factors influencing profit margins have played a crucial role in achieving these positive results.
TE's Industrial Customers Face Inventory Challenges
TE's industrial customers, who specialize in manufacturing machinery, factory equipment, and HVAC components, are currently grappling with an excess inventory problem. To address this issue, they need to destock before considering new orders for components.
According to Curtin, an expert in the field, this destocking phase is expected to persist for a few quarters. However, he remains optimistic about strong growth in the automotive sector, where TE has a larger presence in the electric vehicle (EV) market compared to traditional gas-powered vehicles. The ongoing transition to EVs serves as a positive catalyst for TE's future growth.
For the fiscal second quarter, TE projects earnings per share (EPS) to reach $1.82, with sales totaling $3.95 billion. The average estimates from Wall Street analysts were slightly lower at $1.78 per share and just under $4 billion in sales.
As of Wednesday, TE's stock showed an impressive 8% increase over the past 12 months. In comparison, the S&P 500 and Nasdaq Composite had risen by approximately 21% and 35%, respectively.
Options markets indicate that there is a 3% expectation for stock movement following the earnings announcement on Wednesday. Historically, TE's shares have experienced an average movement of about 3%, both up and down, after the release of quarterly results. This pattern has resulted in two instances of positive upswings and two instances of downward movement during previous quarters.
Among the analysts covering the stock, approximately 55% have rated TE shares as a Buy. This figure aligns with the average Buy-rating ratio for stocks listed on the S&P 500.
The average analyst price target for TE stock stands at approximately $152 per share.
Management will be hosting a conference call at 11 a.m. Eastern time to discuss the company's latest results.
