TE Connectivity Earnings: Auto Strength Offsetting Weakness Elsewhere as We Raise Our Fair Value Estimate to $135

We raise our fair value estimate for shares of narrow-moat TE Connectivity TEL to $135, from $128, as we bake in expectations for a recovery in results beginning in fiscal 2024. Fiscal fourth-quarter results and fiscal first-quarter guidance were roughly in line with our model. TE is seeing pockets of weak demand in industrial equipment, heavy vehicles, and telecom customers, but we’re encouraged by ongoing good results in automotive sales and growth for artificial intelligence, or AI, related sales. We think weak markets will last through the first half of 2024, but that TE can grow modestly in fiscal 2024 and see much more meaningful growth and margin expansion in fiscal 2025. We see shares as undervalued.

September quarter sales dropped 7% year over year and rose 1% sequentially to $4.0 billion. We’re pleased to see sequential growth, even as results throughout fiscal 2023 have been affected by weaker demand in certain markets. Automotive sales are the firm’s primary growth driver, and rose nicely once again, capping off 6% growth for the fiscal year. We also liked seeing 16% sequential growth in TE’s data and devices market, which has seen depressed demand from data center customers, but includes a small but growing exposure to AI.

Non-GAAP operating margin was flat sequentially at 17.3% and down just 10 basis points year over year. TE has managed expenses well in a soft fiscal 2023, and we expect healthy non-GAAP operating margin around 18% for fiscal 2024.

December quarter guidance calls for a mid-single-digit sequential sales decline to a midpoint of $3.85 billion, which we see reflecting normal seasonality. Thereafter, we expect sequential growth through fiscal 2024 behind continued electric vehicle adoption and recoveries in heavy vehicles and industrial equipment in the second half of the year. We see fiscal 2024 as a transition year, with more broad-based demand and stronger growth in fiscal 2025.