Connector manufacturer TE Connectivity Ltd. is done reorganizing operations. The savings from recent restructuring measures are rolling in, cost-cutting expenses are down and the head bean counter at the company is giving senior executives the go-ahead to take advantage of sales growth prospects. The most promising of these opportunities right now is in the transportation sector where global demand is perking up in multiple market segments, including high-end vehicles and trucks.
After two consecutive annual sales declines, TE Connectivity (NYSE:TEL) is growing again. On average, analysts are projecting TE’s fiscal 2014 revenue will reach $14 billion, up 5 percent from $13.3 billion in fiscal 2013. The company itself says fiscal 2014 will be between $13.8 billion and $14.2 billion with earnings also rising strongly on improving business fundamentals and economic revival in key regional markets. TE is its way to achieving its revenue and profit estimates; Sales in the fiscal quarter ended Dec. 27 beat analysts’ consensus estimate, rising to $3.3 billion while profits climbed 26 percent.
“This was a very good start to the year for TE driven by a strong transportation market, continued improvement in most industrial markets and strong execution across the company. And order trends were strong in most of our businesses. The momentum we saw in most of our markets in the second half of our last [fiscal] year has continued through the first four months of this year,” said Thomas Lynch, chairman and CEO at TE during a presentation to investors. “These improving market conditions coupled with our operating leverage improvements driven by TEOA and the accelerated restructuring last year should enable us to deliver strong performance in fiscal 2014.”
The transportation market is leading TE’s recovery and the sector’s contribution to the company’s sales and profits has increased as demand roared back in all key regions, led by China and the United States where high-end automobiles are selling faster than manufacturers like BMW can make them. As analysts tripped over each other earlier this month to congratulate TE on its “good” fiscal 2014 first quarter results, at least one of them also raised concerns about the company’s growing exposure to the automotive industry, which now represents about 40 percent of sales and contributes 60 percent of earnings before interests and taxes (EBIT), according to Amitabh Passi, an analyst with UBS.
Passi noted TE had in the past planned to rebalance its product portfolio and wondered whether the higher contribution from the transportation market could trigger problems down the road for the company if demand slumped again. The response from Lynch shows how hungry the company has become for a sustainable growth story.
“I'm not worried at all about the transportation business getting bigger if it's for natural reasons. The market is growing, we are strong [and] we do well there,” Lynch said. “The customers really value the full value proposition we bring to support them in every part of the world.”
Investors aren’t fazed by TE’s growing profile in the transportation market, either. They were thrilled with the company’s most recent performance and its prospects in 2014. Following the announcement of the fiscal 2014 first quarter results this month, investors jacked up TE’s stock price and market capitalization to a new 52-week high.
There’s more good news ahead for the company tempered with some dark clouds as is typical of a company with exposures to the consumer electronics, PC and networking equipment markets. TE’s performance in the recent quarter shows where it is strong and where it still needs improvement, which may take longer in certain market segments. The transportation division, for instance, posted 14 percent revenue growth in the recent quarter, followed by industrial (6 percent) while sales in network and consumer solutions declined 3 percent and one percent, respectively.
While growth is expected to remain robust in the company’s bigger transportation division and in many of its end markets – energy, industrial and aerospace and defense – TE will continue to feel the pinch of uneven growth in the broadband communications equipment and consumer devices segment. Even these areas will eventually pick up, says Robert Hau, chief financial officer, but it would take time, patience and a jump in volume shipment, which won’t happen until telecom service providers start spending more money on upgrading their infrastructure.
“The telecom business is growing and improving. The SubCom business is one of the lowest points in the last six or seven years. So we're getting really zero leverage out of that business right now,” said Hau during the quarterly conference call with analysts. “The DataCom business is in a turnaround; there is no question about that. So it has the potential for high margins. We did write off a few assets in networks and we think there is opportunity for improvement but it's not going to be sudden. We’re going to need more volume.”