TE Connectivity's Prospects Solid, Near-Term Risks Remain

We issued an updated research report on TE Connectivity Ltd. (NYSE:TEL) on Jun 28.

A market leader in the connectivity and sensor business, TE Connectivity boasts a comprehensive technology and product portfolio that helps it withstand economic distress and cyclical risks.

The company has a dominant share in the connector market, and is taking steps to increase penetration into products and end-markets where it has a limited presence.

We believe that the expansion in the company’s transportation segment & SubCom business along with the Creganna acquisition will prove to be strong growth drivers in coming times.

Headwinds

Despite concrete long-term growth potential, TE Connectivity is presently struggling with several headwinds including softness in its Industrial Solutions segment stemming from the sluggishness in oil & gas and defense-related distribution. Moreover, the strengthening U.S. dollar continues to harm the company’s operating income growth. Also, the slowdown in China continues to put pressure on its operations.

Further, TE Connectivity has increased its expectation for restructuring charges and now expects about $100 million of such charges (up from $50 million) connected to data and devices product exits, elimination of corporate stranded costs from BNS divestiture and general cost reductions in fiscal 2016. These charges will push up costs and hurt margins in the near term.

Steps to Combat Challenges

In recent times, the company has undertaken various measures to address the major challenges in the commodity electronics businesses. TE Connectivity has been realigning its business to enhance its focus on the connectivity and sensor markets. It also seeks to strengthen its market share in applications for harsh environments.

In order to restructure its portfolio, it sold the BNS business to CommScope, and also acquired Creganna, which will aid in establishing a foothold in the high-growth market for minimally invasive integrated solutions.

Going Forward

We believe that the company’s prospects, though solid in the long term, will be somewhat restrained in the immediate future by macro headwinds like weakness in the oil & gas end-market, currency volatility and weak industrial demand.

Talking about estimate revisions, analysts seem to have kept mum on this Zacks Rank #3 (Hold) stock, considering the ongoing broader market concerns. Hence, over the last 7 days, the Zacks Consensus Estimate for 2016 and 2017 earnings per share remained flat at $3.99 and $4.44, respectively.

Some better-ranked stocks in the industry are Fabrinet (NYSE:FN) , Rogers Corporation (NYSE:ROG) and Stoneridge Inc. (NYSE:SRI) , each sporting a Zacks Rank #1 (Strong Buy).