TE Connectivity continues to benefit from the increasing electrification of trucks, automobiles, trains and other forms of transport and machinery.
These changes are being driven by concerns over climate change, and the Ukraine conflict will likely add to the impetus.
These changes provide TE Connectivity with a long and profitable growth path.
Investment Thesis
Back on March 23, 2022 I published the article, "TE Connectivity Stock: A Strong Buy" with the share price at $130.75. Since then, the share price has fallen by 9.45%, which compares to a fall of 12.94% in the S&P 500 over the same period. TE Connectivity (TEL) grew EPS by an average 7.46% for the three years ended 2019. Based on analysts' consensus estimates, EPS is projected to grow by a higher ~10% average per year from 2019 to 2025. The current P/E ratio of 16.79 is below historical average of 17.89, despite consensus EPS growth estimates for 2019 to 2025 being well above EPS growth rate for 2016 to 2019. Even if the multiple were to remain at the current 16.79, based on Seeking Alpha Premium analysts' EPS estimates, returns ranging from ~9% to 19% are indicated, buying at current share price and holding through end of 2025. As discussed below, TE Connectivity's business is well placed to benefit from the change from ICEs to hybrids, BEVs and FCEVs that will inevitably occur over the decades ahead. At current share price, I rate TE Connectivity a Strong Buy.
About TE Connectivity And Its Growth Path
I first alerted my Dividend Growth Income+ Club members to the TE Connectivity opportunity in an article dated August 8, 2020, exclusive to Club members (share price then $92.42, current share price $118.39). At the time, there was a concern the change from ICEs to BEVs and FCEVs would unfavorably impact TE Connectivity. Excerpted from that article , and still highly relevant today,
Looking ahead to 2030, where I see outstanding opportunity for TEL is in the paradigm shift: from fossil fuel powered transport to the electrification of all modes of transportation; and to increasing automation of transportation of people and goods, facilitated by electrification. The internal combustion engine may be today's "buggy whip", and the shares of suppliers of components to ICE powered vehicle manufacturers are presently out of favor. But TEL should only see improvement in its business, with the automation and electrification of transportation in all its forms. TEL is a supplier of sensors and electronics to a range of industries, including automotive, its core market. It supplies to manufacturers of ICE, BEV and hybrid vehicles. In its earnings call on July 29 , TEL estimated the value of its inputs supplied for BEVs is twice the value of its inputs for ICE vehicles, and one and one-half times for hybrids.
TE Connectivity's products address the future direction of the markets it operates in.
Slide 1:
TE Connectivity website
The company is very focused on trends to stay relevant.
Slide 2:
TE Connectivity website
And although it will not be the sole form of clean fuel, the future of transportation will undoubtedly include electric propulsion. From a curiosity, to a rarity, to a reality, electric vehicles (EVs) are clearly on a path to becoming a necessity.
Smart home technology linked to the cloud -
Slide 3:
TE Connectivity website
Slide 4:
TE Connectivity website
The above are just a few illustrations of a very wide product range addressing a wide target market.
There was considerable discussion in TEL's Q2 2021 (qtr ended Mar. 31, 2022) conference call in regard to the Ukraine conflict. TE Connectivity has had various impacts from supply chain disruption, some good through customers increasing orders as insurance against ongoing disruption of their businesses. The company did not have any production in Ukraine, but did have Tier 1 customers there. Some of these customers have had to shift operations outside of Ukraine taking inventory and purchasing within EMEA to other parts of Eastern Europe or Morocco or elsewhere.
My usual detailed structured financial analysis follows below.
Looking For Share Market Mispricing Of Stocks
What I'm primarily looking for here are instances of share market mispricing of stocks due to distortions to many of the usual statistics used for screening stocks for buy/hold/sell decisions. The usual metrics do not work when the "E" in P/E is distorted by the impact of COVID-19. And if the P/E ratio is suspect, so too, then, is the PEG ratio similarly affected. I believe the answer is to start with data at the end of 2019, early 2020, pre-COVID-19 and compare to projections out to the end of 2022 or later, when hopefully the impacts of COVID-19 will have largely dissipated. Summarized in Tables 1, 2, and 3 below are the results of compiling and analyzing the data on this basis.
Table 1 - Detailed Financial History And Projections
Seeking Alpha Premium
Table 1 documents historical data from 2016 to 2019, including share prices, P/E ratios, EPS and DPS, and EPS and DPS growth rates. The table also includes estimates out to 2025 for share prices, P/E ratios, EPS and DPS, and EPS and DPS growth rates (note - while estimates are shown for analysts' EPS estimates out to 2023, 2024 and 2025 where available, estimates do tend to become less reliable, the further out the estimates go. These estimates are only considered sufficiently reliable if there are at least three analysts' contributing estimates for the year in question). Table 1 allows modeling for target total rates of return. In the case shown above, the target set for total rate of return is 7.5% per year through the end of 2025 (see line 12), based on buying at the June 24, 2022 closing share price level. As noted above, estimates become less reliable in the later years. I have decided to input a target return based on 2025 year, which has EPS estimates from four analysts. The table shows to achieve the 7.5% return, the required average yearly share price growth rate from June 24, 2022 through Dec. 31, 2025, is 5.6% (line 50). Dividends and dividend growth account for the balance of the target 7.5% total return. Table 2 below summarizes relevant data flowing from the assumption of a target 7.5% total return through end of 2025.
TEL Stock - Targeting A 7.5% Return
Table 2 - Targeting a 7.5% return
Seeking Alpha Premium
Table 2 provides comparative data for TE Connectivity, assuming share price grows at rates sufficient to provide total rate of return of 7.5%, from buying at closing share price on June 24, 2022, and holding through end of 2025. All EPS estimates are based on analysts' consensus estimates per SA Premium.
Comments On Table 2 Are As Follows
Part 1 - Consensus EPS (Case 1.1) (lines 1 to 12)
Part 1 shows the amounts the share price would need to increase to achieve a 7.5% rate of return through end of 2025. The share price would need to increase by $25.21 from the present $118.39 to $143.60 at end of 2025, for the 7.5% rate of return to be achieved.
Part 2 - Required change in P/E ratio to achieve target 7.5% return (lines 21 to 23)
Part 2 shows the amount the P/E ratio would need to increase or decrease by, from buy date to end of 2025, to achieve the share price level at the end of 2025 necessary to achieve the targeted 7.5% return. For TE Connectivity, the P/E ratio at buy date can decrease by (13.6)% through end of 2025 and the 7.5% return would still be achieved. Being able to achieve a targeted return with a decrease in the P/E ratio would normally be regarded as a positive. However, due to the distortions of earnings and sentiment owing to the COVID-19 pandemic, it's difficult to judge whether the change in P/E ratio is a positive or the result of a distorted starting point. To overcome this difficulty, in Part 3, I review the necessary change in P/E ratio from a different, pre-COVID-19 starting point.
Part 3 - Projected change in Share Price, EPS and P/E ratios from 2019 to 2025 (lines 31 to 53)
In Part 3, I start with the share price at Dec. 31, 2019, before the impact of the COVID-19 pandemic on earnings and market sentiment. The end point is projected share price at end of 2025, when it's assumed the market and earnings are no longer materially impacted by the pandemic, and EPS growth has brought the P/E ratio back closer to historical levels. For TE Connectivity, the share price needs to increase by $47.76 from $95.84 at Dec. 31, 2019 to $143.60 at end of 2025, and as detailed in Part 1, at $143.60, the targeted 7.5% rate of return would be achieved. For TE Connectivity, there are a number of givens in our assumptions. Using these givens, the change in the share price from Dec. 31, 2019, to end of 2025, can be expressed as mathematical formulae as follows:
A) Change in share price, due to effect of EPS growth rate, equals share price at beginning multiplied by (1 plus average yearly Consensus EPS growth rate) to the power of number of years invested.
= $95.84*(1+10.4%)^6 = $173.78 (that would be the result if the share price grew in line with EPS growth, and the P/E multiple remained constant)
B) Change in share price due to change in P/E ratio equals share price adjusted for EPS growth rate multiplied by (1 plus/minus percentage change in P/E ratio).
= $173.78*(1-17.4%) = $143.60 (price required at end of 2025 to provide 7.5% total return, buying at current share price)
The increase of $77.94 ($173.78 minus $95.84) due to the average yearly EPS growth rate is cumulative, and share price will continue to increase the longer the shares are held and the growth rate continues. The decrease of $30.18 due to a change in the P/E ratio ($173.78 minus $143.60) has a one-off effect. A continuing high or low P/E ratio has no impact on future share price growth, only a change in P/E ratio affects share price, not the level of P/E ratio.
Next, rather than targeting a specific rate of return, I look at historical P/E ratios to see the potential impact on returns of a reversion to these levels of P/E ratio. First of all, I should explain a little about the Dividend Growth Income+ Club approach to financial analysis of stocks.
Understanding The Dividend Growth Income+ Club Approach
Copyright: Robert Honeywill 2020
The only way an investor can achieve a positive return on an investment in shares is through receipt of dividends and/or an increase in the share price above the buy price. It follows what really matters in share value assessment is the expected price at which a buyer will be able to exit shares, and expected cash flow from dividends.
Changes in Share Price
Changes in share price are driven by increases or decreases in EPS and changes in P/E ratio. Changes in P/E ratio are driven by investor sentiment toward the stock. Investor sentiment can be influenced by many factors, not necessarily stock-specific.
"Equity Bucket"
Earnings are tipped into the "Equity Bucket" for the benefit of shareholders. It's prudent to check whether distributions out of and other reductions in the "Equity Bucket" balance are benefiting shareholders.
TE Connectivity's Projected Returns Based On Selected Historical P/E Ratios Through End Of 2025
Table 3 below provides additional scenarios projecting potential returns based on select historical P/E ratios and analysts' consensus, low, and high EPS estimates per Seeking Alpha Premium through end of 2025.
Table 3 - Summary Of Relevant Projections TE Connectivity
Seeking Alpha Premium
Table 3 provides comparative data for buying at closing share price on June 24, 2022 and holding through the end of years 2021 through 2025. There is a total of nine valuation scenarios for each year, comprised of three EPS estimates (SA Premium analysts' consensus, low and high) across three different P/E ratio estimates, based on historical data. Table 3 shows potential returns from an investment in shares of the company at a range of historical level P/E ratios This analysis, from hereon, assumes an investor buying TE Connectivity shares today would be prepared to hold through 2025, if necessary, to achieve their return objectives. Comments on contents of Table 3, for the period to 2025 column follow.
Consensus, low and high EPS estimates
All EPS estimates are based on analysts' consensus, low and high estimates per SA Premium. This is designed to provide a range of valuation estimates ranging from low to most likely, to high based on analysts' assessments. I could generate my own estimates, but these would likely fall within the same range and would not add to the value of the exercise. This is particularly so in respect of well-established businesses such as TE Connectivity. I believe the "low" estimates should be considered important. It's prudent to manage risk by knowing the potential worst-case scenarios from whatever cause.
Alternative P/E ratios utilized in scenarios
The actual P/E ratios at share buy date based on actual non-GAAP EPS for Q4-2021 TTM.
A modified average P/E ratio based on 23 quarter-end P/E ratios from Q4 2016 to Q1 2022 plus current P/E ratio in Q2 2022. The average of these P/E ratios has been modified to exclude the three highest and three lowest P/E ratios to remove outliers that might otherwise distort the result.
A median P/E ratio calculated using the same data set used for calculating the modified average P/E ratio. Of course, the median is the same whether or not the three highest and lowest P/E ratios are excluded.
The actual P/E ratio at February 21, 2020 share price, based on 2019 non-GAAP EPS. The logic here is the market peaked around February 21, 2020, before any significant impact from COVID-19 became apparent. This makes the P/E ratios at Feb. 21, 2020, reflective of most recent data before distortion of P/E ratios by the impact of the coronavirus pandemic.
Reliability of EPS estimates (line 17)
Line 17 shows the range between high and low EPS estimates. The wider the range, the greater disagreement there is between the most optimistic and the most pessimistic analysts, which tends to suggest greater uncertainty in the estimates. There are four analysts covering TE Connectivity through end of 2025. In my experience, a range of 6.2 percentage points difference in EPS growth estimates among analysts is getting a little high, which suggests some degree of uncertainty, and thus decreased reliability.
Projected Returns (lines 18 to 39)
Lines 25, 32 and 39 show, at a range of historical P/E ratio levels, TE Connectivity is conservatively indicated to return between 7.7% and 17.3% average per year through the end of 2025. The 7.7% return is based on analysts' low EPS estimates and the 17.3% on their high EPS estimates, with an 11.6% return based on consensus estimates. Those are the lowest of the returns under the consensus, low and high EPS scenarios, and assume the P/E ratio increases slightly from the current 16.79 to 16.80 at end of 2025. At the high end of the projected returns for TE Connectivity, the indicative returns range from 9.4% to 19.3%, with consensus 13.5%. These returns are based on the P/E ratio increasing from the current level of 16.79 to the historical average of 17.89. This assumption could be conservative. Per Table 1 above, analysts' average yearly EPS growth rate estimate for 2019 to 2025 is 10.43%, well above the 7.46% historical EPS growth rate for 2016 to 2019.
Review Of Historical Performance For TE Connectivity
TE Connectivity: Historical Shareholder Returns
In Table 4 below, I provide details of actual rates of return for TE Connectivity shareholders investing in the company over the last six years.
Table 4
Seeking Alpha Premium
For many stocks where I create a table similar to Table 4 above, I find a wide range of returns indicating a degree of volatility and risk. Table 4 above shows the results for TE Connectivity were double-digit returns, ranging from 10.5% to 21.5%, for six of nine different investors, each investing $3,000 over the last six years and holding to the present. Two other investors had mid to high single digit returns ranging from 6.9% to 9.3%. The remaining investor is currently showing a return of 0.2%, but I expect the share price will likely improve to provide solid returns if this investor continues to hold. These rates of return are not just hypothetical results. They are very real results for anyone who purchased shares on the various dates and held through to June 24, 2022. In the above examples, the assumed share sale price is the same for all investors, illustrating the impact on returns of the price at which an investor buys shares.
Checking TE Connectivity's "Equity Bucket"
Table 5.1 TE Connectivity Balance Sheet - Summary Format
Seeking Alpha Premium & SEC filings
Over the 5.5 years end of Sep. 2016 to end of Mar. 2022, TE Connectivity has increased shareholders' funds by $1,957 million. This $1,957 million was used to increase net assets used in operations by $1,840 million and reduce debt net of cash by $117 million. Net debt as a percentage of net debt plus equity decreased from 28.7% at end of Sep. 2016 to 24.0% at end of Mar. 2022. Outstanding shares decreased by 32.5 million from 355.3 million to 322.8 million, over the period, due to share repurchases offset in part by shares issued for stock compensation. The $1,957 million increase in shareholders' equity over the last 5.5 years is analyzed in Table 5.2 below.
Table 5.2 TE Connectivity Balance Sheet - Equity Section
Seeking Alpha Premium & SEC filings
I often find companies report earnings that should flow into and increase shareholders' equity. But often the increase in shareholders' equity does not materialize. Also, there can be distributions out of equity that do not benefit shareholders. Hence, the term "leaky equity bucket." I look for evidence of this in my analysis of changes in shareholders' equity.
Explanatory comments on Table 5.2 for the period end FY-2016 to end Q1-2022.
Reported net income (non-GAAP) over the 5.5-year period totals to $9,981 million, equivalent to diluted net income per share of $29.19.
Over the 5.5-year period, the non-GAAP net income excludes a significant $743 million (EPS effect $2.29) of items regarded as unusual or of a non-recurring nature in order to better show the underlying profitability of TE Connectivity. In the case of TE Connectivity, the net total adjustment is primarily due to exclusion of a goodwill impairment charge of $900 million booked in FY 2020.
Other comprehensive income includes such things as foreign exchange translation adjustments in respect to buildings, plant, and other facilities located overseas and changes in valuation of assets in the pension fund - these are not passed through net income as they fluctuate without affecting operations and can easily reverse in a following period. Nevertheless, they do impact on the value of shareholders' equity at any point in time. For TE Connectivity, these items were $205 million (EPS effect $0.56) positive over the 5.5-year period.
The company has a stock compensation scheme. Amounts recorded in the income statement for stock compensation are less than the market value of shares used to settle equity awards. The effect is a reduction of $530 million (EPS effect $1.55) compared to reported income. This is considered material in the context of total net income over the 5.5-year period.
By the time we take the above-mentioned items into account, we find, over the 5-year period, the reported non-GAAP EPS of $29.19 ($9,981 million) has decreased to $25.92 ($8,913 million), added to funds from operations available for distribution to shareholders.
Dividends of $3,799 million, and share repurchases of $4,762 million were covered by the $8,913 million generated from operations, leaving a $352 million net increase in equity from operations
This net $352 million increase from operations, after dividends and share repurchases, and the $1,605 million from equity issues to staff, are the source of the $1,957 million increase in shareholders' funds per Table 5.1 above.
Summary And Conclusions
TE Connectivity's business is positioned to grow strongly with the move to hybrid and battery electric and fuel cell electric vehicles. It is a no-lose situation for the company, as its products are used in ICE vehicles and even more so in the new generation vehicles. Net debt to debt plus equity ratio is low at 24.0%. EPS can be expected to grow through increasing earnings and share count reduction due share repurchases. Per SA Premium June 17, 2022 news article, the company has authorized an increase in its share repurchase program by $1.5 billion. Current P/E multiple is below historical average and SA analysts' estimates reflect anticipated EPS growth rates well above past EPS growth rates. I found it surprising TE Connectivity earns an SA QUANT rating of Hold, versus Wall Street rating of Buy and my own rating of Strong Buy. Looking closer, there are three companies in TE Connectivity's sector with SA Quant Strong Buy ratings, with two Strong Buys and one Buy from Wall Street analysts. Under the SA QUANT sector by sector comparison system this would explain why TE Connectivity is rated a Hold only. So, this could be the case of a top company, well worth investing in, being compared against three elite companies. I find it interesting the QUANT system brings this to attention, and I am encouraged to take a look in depth at these other companies. My assessment is TE Connectivity remains a Strong Buy.
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TE Connectivity Ltd. New Switzerland Registered Shares Company Name:
2024-07-14 20:44:00 ET Stock Traders Daily has produced this trading report using a proprietary method. This methodology seeks to optimize the entry and exit levels to maximize results and limit risk, and it is also applied to Index options, ETFs, and futures for our subscribers. This...
TE Connectivity to report third quarter financial results on July 24, 2024 PR Newswire SCHAFFHAUSEN, Switzerland , July 10, 2024 /PRNewswire/ -- TE Connectivity Ltd. (NYSE: TEL) will report financial results for the third quarter of fiscal 2024 before tradin...
TE Connectivity shareholders approve proposals at Special General Meeting PR Newswire SCHAFFHAUSEN, Switzerland , June 12, 2024 /PRNewswire/ -- The shareholders of TE Connectivity Ltd. (NYSE: TEL) approved each proposal presented at the June 12 Special G...
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