Electrical components supplier
TE Connectivity
does a little of everything, serving customers in industries from aerospace to cars to telecommunications.
Its earnings are a good read on what’s going on in the industrial economy. Some areas are doing better than others.
TE (ticker: TE) reported better-than-expected quarterly earnings on Wednesday morning. Management’s forecasts for the current quarter look solid, too.
For its fiscal third quarter, TE’s earnings per share came in at $1.77 from sales of $4 billion. Wall Street was looking for EPS of $1.66 from sales of $4.1 billion. Orders came in at about $4 billion, giving the company a book-to-bill ratio of 1 in the fiscal third quarter.
TE stock was up 2.3% in late morning trading. The
S&P 500
and
Dow Jones Industrial Average
were both down about 0.1%.
Looking ahead, TE expects fiscal fourth-quarter EPS of $1.75 from sales of $4 billion. Wall Street is currently projecting $1.73 and $4.1 billion, respectively
The fact that management’s guidance is above the numbers the Street had penciled in is good news partly because TE typically exceeds its own forecasts. Guidance for the fiscal third quarter was for EPS of $1.65 a share. Over the past eight quarters, TE has beaten its own EPS guidance seven times, by an average of 7 cents. If that happens again, EPS could hit $1.82 a share.
“Our leading global position in electric vehicles once again allowed us to deliver a strong performance in transportation, and we continued to capitalize on growth momentum in renewable energy applications as well as ongoing market recovery in commercial air and medical in our Industrial segment,” said CEO Terrence Curtin in a news release.
“While our communications segment declined as expected, we are excited about our increased design win momentum in AI applications, where our high-speed connectivity solutions will drive future growth,” he added.
In the fiscal third quarter, sales in the communications segment fell to $424 million from $671 million in the same quarter last year. Operating profit margins dipped to 13% from 25.5%.
That business was a major pandemic-era beneficiary, Stuck-at-home consumers and workers upgraded their devices and home appliances, while data-center and telecommunications companies invested in new equipment to handle growing demand for data.
The year-ago period was the pandemic-driven peak for TE’s communications segment—revenue was up 55% in two years—and sales have declined in every quarter since. They are now back to fiscal 2020 levels, before the pandemic-era boost.
The year-over-year collapse in the segment’s profit margin is operating leverage in action. Lower sales mean less unit volume to spread fixed costs over. It’s typical of products with big swings in demand: Margins expand at the top of the cycle and contract at the bottom. TE’s 25.5% communications margin a year ago wasn’t sustainable, but it shouldn’t be as low as the 13% margin in the reported quarter for long either.
An average operating profit margin somewhere in the neighborhood of 20% is the goal through an entire cycle, Curtin said. He sees signs of bottoming in the segment.
“This was the first time since the first quarter of our fiscal 2022, when our orders actually went up in communications,” Curtin told Barron’s. “A lot of that was driven by AI-related orders.”
AI-related servers and cloud infrastructure require more and faster interfaces throughout the architecture, meaning more demand for TE’s products. Curtin said that TE gets some 50% more revenue per unit in an AI-related server than a traditional one.
The term “artificial intelligence” or “AI” came up 13 times on TE’s earnings call on Wednesday morning, according to a transcript from Sentieo. That is as many times as it was mentioned on the past three earnings calls combined.
Weakness in the communications segment was mitigated by strength in cars and other markets. Industrial sales rose by a hair to $1.14 billion from $1.13 billion year over year, while profit margins dipped by almost 2 percentage points—coming in at 13.1%.
Transportation was the standout. Sales rose to $2.4 billion from $2.3 billion a year ago. Profit margins improved to 17.5% from 14.7%. Results were up with the continuing recovery in global auto production and the trend toward electric vehicles. TE sells more content on an EV than on a conventional car.
EVs, of course, are synonymous with
Tesla
(TSLA), and TE supplies parts to the market leader. Tesla sold about 466,000 cars in the calendar second quarter of 2023, up from about 255,000 sold in the same quarter in 2022.
Coming into Wednesday trading, TE stock was up 23% so far this year for a gain of about 15% over the past 12 months.
Write to Al Root at [email protected]
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