TE Connectivity (TEL) Rides High On Positive Industry Trends

Last month, TE Connectivity Ltd. (NYSE:TEL) came up with its third-quarter fiscal 2017 results, wherein it came up with its seventh consecutive earnings beat. Buoyed by positive industry trends and solid operational execution, the company raised its 2017 bottom-line guidance third time in a row.
Let’s take a better look at the long-term growth drivers of the company.

Overarching Business Model

The company’s long-term growth strategy rests on three pillars — drive above market expansion through focus on harsh environment applications, leverage on “TEOA continuous improvement” system to expand margin and execute a balanced capital allocation strategy. Overall, strong demand in end markets, along with its overarching business model, helped TE Connectivity improve organic sales by 8% and adjusted EPS by 15%.

Solid Harsh Application Business

TE Connectivity is the market leader in the connectivity and sensor business, armed with a comprehensive portfolio. About 80% of TE Connectivity’s revenues are driven by harsh environment applications. Over the past five years, the company’s harsh business applications have experienced mid-single digit growth, driving top-line growth.

Going forward, the company believes that this business will provide ample opportunities of margin expansion. Also, it might help fend competition from key players including Hubbell Incorporated (NYSE:HUBB) , Honeywell International Inc. (NYSE:HON) and Amphenol Corporation (NYSE:APH) .

Positive Industry Trends

Of late, TE Connectivity’s transportation business is showing remarkable signs of progress, adding to its strength. Growth in electronic content and a rich pipeline of platform ramps from design wins bode well for the company’s transportation business. For fiscal 2017, the company expects high-single-digit organic rise in auto on approximately 3% production growth.

Commercial Transportation business has been faring well, driven by the content expansion in the heavy truck market, especially in China, content growth due to the adoption of new emission standards and regulations. Also, healthy demand from Europe and North America are expected to supplement growth. TE Connectivity continues to expect mid-single-digit increase for the full year in sensors business.

The other businesses of the company, namely Industrial and Communications Solutions are also faring well and TE Connectivity believes that they have ample room for growth, going forward. The company has affirmed that much of its operating margin expansion in the past few years have been driven by the transportation segment. However, of late Communications and Industrial business is contributing significantly to margin expansion.

Going forward, Industrial Solutions segment is anticipated to grow organically in low-single overall through the Creganna and Intercontec acquisitions. Further, the Communications segment has bright prospects and is expected to grow by solid growth in appliances and SubCom business line. Also, high-speed ramps in cloud infrastructure customers are expected to be conducive to growth.

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