Can TE Connectivity Maintain Its Beat Streak In Q4 Earnings?

Connectivity and sensor solutions manufacturer, TE Connectivity Ltd. (NYSE:TEL) is scheduled to report fourth-quarter fiscal 2017 results on Nov 1.

TE Connectivity has an excellent earnings surprise history, with an average positive surprise of 9.5% in the trailing four quarters. The company scored its seventh consecutive earnings beat in the last reported quarter, beating estimates by 6%. However, the company anticipates weak revenues in Transportation Solutions in the upcoming quarter, which constitutes the major portion of its total revenues.

Let's see how things are shaping up prior to this announcement.

Factors at Play

Primarily depended on end market dynamics, TE Connectivity’s business remains susceptible to cyclical risks that the end markets suffer. Though the company witnessed some extent of stability in direct business with OEMs, poor sales through distribution channels took longer-than-expected recovery time, consequently hurting the segmental performance. These factors could be a drag on segment margin and affect its profitability in the upcoming quarter.

The company’s commercial transportation market is yet to witness signs of stabilization due to weak global construction and agriculture markets, along with weakness in the North America heavy truck markets. This apart, the company believes the supply chain inefficiencies can prove to be a drag on the earnings in the quarter under review. These factors can severely undermine TE Connectivity’s growth prospects.

Moreover, sluggishness in oil and gas markets along with its derivative impact on other industrial markets will likely act as major headwinds for TE Connectivity. Further, helicopter demand has also been impacted negatively, which can prove to be a drag on the company’s aerospace business.

Notably, the Zacks Consensus Estimate for revenues from the Transportation Solutions segment in the to-be-reported quarter currently remains low at $1,670 million compared with fiscal third-quarter revenues of $1,765 million. Revenues from Industrial Solutions segment are also anticipated to be low sequentially, with an estimate of $880 million compared with reported revenues of $905 million in the prior quarter.

However, being a market leader in the connectivity and sensor business, TE Connectivity is armed with a comprehensive portfolio that supplements its strength. About 80% of the company’s revenues are driven by harsh environment applications. In the past five years, the company’s harsh business applications have had experienced mid-single digit growth, driving top-line growth. Going forward, we believe that this business will provide ample opportunities of margin expansion in the upcoming quarter.

Moreover, the company’s Commercial transportation business is showing remarkable signs of progress driven by the content expansion in the heavy truck market, especially in China. Growth in electronic content as well as a rich pipeline of platform ramps from design wins bode well for the company’s transportation business, going forward.

Furthermore, during the previous quarter, the company enhanced its harsh environment portfolio with bolt-on acquisitions in the Automotive and Medical business by entering into an agreement to acquire Hirschmann Car Communication and purchasing MicroGroup. These acquisitions will unlock expansion opportunities, and advance content growth in key applications for the automotive and medical markets. This bodes well for the to-be-reported quarter’s top-line.

Earnings Whispers

Our proven model does not conclusively show an earnings beat for TE Connectivity this time around. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here as you will see below.

Zacks ESP: Earnings ESP for the company is 0.00% as both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $1.16. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

TE Connectivity Ltd. Price and EPS Surprise

TE Connectivity Ltd. Price and EPS Surprise | TE Connectivity Ltd. Quote

Zacks Rank: TE Connectivity has a Zacks Rank #4 (Sell). The company’s ESP of 0.00% makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Adobe Systems Incorporated (NASDAQ:ADBE) has an Earnings ESP of +0.25% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Advanced Micro Devices, Inc. (NASDAQ:AMD) has an Earnings ESP of +6.28% and a Zacks Rank #2.

Fitbit, Inc. (NYSE:FIT) has an Earnings ESP of +3.23 % and a Zacks Rank #2.

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