Auto, aerospace, and communication-equipment supplier
TE Connectivity
reported better-than-expected quarterly earnings. Guidance was good, too. It took improving profitability to produce the beat. Revenue growth is harder to come by.
On Wednesday morning, TE reported results for the first quarter of its fiscal year, which corresponds to the last three months of 2023.
Adjusted earnings per share were $1.84, up 20% from a year ago, on sales of $3.83 billion, down 0.3% from the year-ago period. Wall Street was looking for adjusted earnings per share of $1.71 on sales of $3.87 billion, according to FactSet.
The earnings growth and beat all came thanks to better profit margins in the quarter on flat revenue. TE’s adjusted operating-profit margin came in at 19.1% in the three months, up 2.9 percentage points from the same period a year ago and much better than the 17.4% consensus estimate.
TE CEO Terrence Curtin attributed the margin expansion to the company’s cost-cutting efforts, the delayed impact of price increases, and economies of scale in its transportation segment, in particular.
A lack of overall sales growth might concern investors, but there’s more going on under the surface, Curtain says. “Destocking is costing about $100 million of revenue per quarter.” That works out to a couple of percent of sales and is offsetting some of the growth from aerospace and automotive end-markets. Medical and energy customers are doing fine, too.
However, TE’s other industrial customers—makers of factory, machinery, HVAC equipment, and other components of buildings, manufacturing facilities, and more—are sitting on too much inventory. They need to reduce, or destock, before ordering more components.
Curtin expects the destocking there to last for a few quarters. He’s bullish on stronger growth from automotive end-markets, where TE sells more parts per electric vehicle than gas-guzzler—the EV transition is a tailwind.
For the fiscal second quarter, TE is forecasting earnings per share of $1.82 on sales of $3.95 billion. Wall Street had expected earnings per share of $1.78 on sales of just under $4 billion.
Sales weakness and destocking might be weighing on investor sentiment. Shares were down about 0.9% in premarket trading.
S&P 500
and
Nasdaq Composite
futures were up about 0.4% and 0.7%, respectively.
Coming into Wednesday trading, TE stock was up about 8% over the past 12 months, while the S&P 500 and Nasdaq were up about 21% and 36%, respectively.
Options markets imply shares will move up or down 3%, following earnings on Wednesday morning, as they have in the past four quarters. Upward and downward moves have been evenly split.
Currently, 55% of analysts covering TE stock have Buy ratings—the same ratio for S&P 500 component stocks—and the average price target is about $152.
Management hosts a conference call at 8:30 a.m. Eastern time to discuss results.
Write to Al Root at [email protected] and Nicholas Jasinski at [email protected]
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