In this article, let's take a look at TE Connectivity Ltd (TEL, Financial), a $24.74 billion market cap company, which is a company which designs, manufactures and markets engineered electronic components and network solutions for the automotive, appliances, aerospace and defense, telecommunications, computers and consumer electronics industries.
Leading positions
In the past, the company was analyzing internal processes and structures and making huge investments in restructuring, in search of better productivity and margin expansion or stabilizing them. For example, the firm exited from non-strategic or low-margin businesses, while moving production to low-cost regions, such as China. Further, it has also reorganized its business segments.
It is the biggest player in the sub-industry, and we think certain actions like continuing investing in R&D will help it maintain its leader position.
Revenue growth
We believe the company can achieve an interesting growth due to its investments in new lines, a greater products mix and strategic acquisitions. In 2010, it completed the acquisition of ADC Telecommunications, in a cash and debt deal. In 2012, it completed the acquisition of Deutsch Group.
We must mention that TE depends too much of the transportation sector, which is a high-margin business. Management is trying to diversify its business model but transportation will continue to be a key driver.
Estimated one-year price
According to Yahoo! Finance, the estimated one-year target share price is $68.91 so if you buy shares at current market price ($60.44), your return from price appreciation would be 14%. In addition, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of 29 cents per share each quarter, totalizing $1.16 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on an investment for a stock, and in this case is 1.8%. So the total expected return for investing in TE is 15.8%, which we believe is an attractive stock return.
Revenues, margins and profitability
Looking at profitability, revenue growth by 3.79% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.97 vs $0.79). The gross profit margin is considered high at 37.93% and the net profit margin of 11.25% is above that of the industry average.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| TEL | TE Connectivity | 17.87 |
| TRMB | Trimble Navigation Ltd | 11.70 |
| FLEX | Flextronics International Ltd | 22.12 |
| JBL | Jabil Circuit Inc | 16.95 |
| CLS | Celestica Inc | 11.17 |
| Â | Industry Median | 5.87 |
The company has a current ROE of 17.87% which is higher than the industry median. Also, it is higher than the one exhibit by Trimble Navigation (TRMB, Financial), Jabil Circuit (JBL, Financial) and Celestica (CLS, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Flextronics (FLEX, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 16.8x, trading at a discount compared to an average of 19.3x for the industry. To use another metric, its price-to-book ratio of 2.8x indicates a premium versus the industry average of 1.54x while the price-to-sales ratio of 1.8x is above the industry average of 0.93x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $29.516, which represents a 24.2% compound annual growth rate (CAGR).
Final comment
As outlined in the article, looking for greater efficiency, the company made efforts to improve its operating margins by exiting some businesses while also restructuring. Further, the management is targeting long-term revenue growth of 5% to 7%, doubling the last three-year average.
The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus like Jean-Marie Eveillard (Trades, Portfolio), Robert Olstein (Trades, Portfolio), Steven Romick (Trades, Portfolio) and Lou Simpson (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as First Pacific Advisors (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned
