Will TE Connectivity (TEL) Disappoint In Q4 Earnings?

TE Connectivity Ltd. (NYSE:TEL) is set to report fourth-quarter fiscal 2016 earnings results, before the opening bell on Nov 2.

Last quarter, the company had posted a positive earnings surprise of 3.9%. The stock has a decent surprise history over the trailing four quarters, having beaten estimates thrice with an average positive surprise of 3.1%.

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

Factors Affecting This Quarter

TE Connectivity’s fiscal fourth-quarter results are expected to be impacted by cyclical risks, threatening most of its end markets. Of late, the company has been grappling with unfavorable macroeconomic issues, including sluggish oil and gas market as well as defense-related distribution softness, that have proved to be major drags on the Industrial Solutions segment’s top-line performance.

Low prices in oil & gas have been bringing down sales in the industrial equipment business and areas like factory equipments and rail as well. Helicopter demand has also been affected on account of these factors.In addition, weak global construction, agriculture markets along with sluggish heavy truck markets have been hampering the commercial transportation market. These have hurt the company’s revenues and are expected to mar the top-line performance in the fiscal fourth quarter.

This apart, a major portion of TE Connectivity’s net sales is invoiced in currencies other than the U.S. dollar, which can play a major spoilsport for the soon–to-be-reported quarter’s top-line performance. For instance, during third-quarter fiscal 2016, operating income was down almost 4% year over year, dragged by the negative impact from unfavorable foreign currency translation. Further, inflated restructuring charges may also add to the company’s woes for the fiscal fourth quarter.

Concurrent with the fiscal third-quarter earnings release, the company had provided its guidance for restructuring expenses. It forecasted 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 are likely to hurt margins for the to-be-reported quarter. In one of its restructuring bids, the company divested its circuit protection business. This, in turn, is likely to hit its communications business.

Despite these negatives, TE Connectivity’s prominent presence in the sensor business and continuous order wins across market verticals, are expected to supplement its financials for the fiscal fourth quarter. In addition, thriving minimally invasive medical markets and strong commercial aerospace & defense businesses are estimated to act as other major profit churners for the quarter. These are likely to offset the negatives to some extent. This apart, TE Connectivity’s transportation business is anticipated to reap the benefits of robust auto production growth in key end markets, including Europe and China.

Earnings Whispers

Our proven model does not conclusively show that TE Connectivity will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat consensus estimates. That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -1.68%. This is because the Most Accurate estimate is pegged at 1.17 cents while the Zacks Consensus Estimate is slightly higher at 1.19 cents.

Zacks Rank: TE Connectivity carries a Zacks Rank #4 (Sell). As it is, 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.

Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises.

Stocks That Warrant a Look

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:

Stratasys Ltd. (NASDAQ:SSYS) has an Earnings ESP of +41.67% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

CSRA Inc. (NYSE:CSRA) has an Earnings ESP of +2.17% and a Zacks Rank #2.

Inovalon Holdings, Inc. (NASDAQ:INOV) has an Earnings ESP of +50.0% and a Zacks Rank #2.

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