On Thursday, Wolfe Research initiated coverage on TE Connectivity (NYSE:TEL) stock with a favorable Outperform rating and a price target of $187.00. The firm anticipates a resurgence in organic growth for the company, despite a period of stagnation over the past two years and current softness in certain end-markets, including Light Vehicle (LV) Auto and Commercial Transportation.
The analysis suggests that TE Connectivity's top-line performance could improve significantly, forecasting a 6% growth in fiscal year 2025 and 8% in 2026, compared to approximately zero percent growth in 2023 and 2024.
The company is expected to continue its strong performance in the automotive sector, particularly due to its stable market share and its positioning to benefit from the shift towards vehicle electrification.
TE Connectivity's connectors and high-speed cable solutions for AI servers are also seen as a growth opportunity, with revenues expected to more than double in fiscal year 2025 compared to 2024, surpassing $500 million.
TE Connectivity's impressive cost management is cited as a factor that positions the company to exceed prior margin targets. Despite declining revenues in fiscal year 2024, the company is on track to achieve more than a 200 basis point expansion in EBIT margin. Wolfe Research projects margins to improve steadily towards 20% by fiscal year 2026, aided by additional restructuring savings and recovery in high-margin sub-segments such as Industrial Equipment.
Furthermore, the firm highlights TE Connectivity's valuation as compelling, noting that the stock is trading below the S&P 500 multiple and considerably lower than its peer Amphenol Corp . (NYSE:APH). The report suggests that a return to TE Connectivity's historical valuation relative to the S&P 500 could support the $187 price target by the end of fiscal year 2025, with potential for further expansion as the company demonstrates sustainable growth, an improved cost structure, and robust free cash flow conversion.
In other recent news, TE Connectivity exhibited a strong financial performance in its third quarter, meeting sales expectations and surpassing earnings per share (EPS) projections. The company's sales reached the $4 billion mark, signifying a 2% organic growth year-over-year, while the adjusted EPS climbed to $1.91, marking an 8% increase from the previous year.
TE Connectivity also generated a record $2 billion in free cash flow over the first three quarters. The company has revised its forecast for AI-related revenues for fiscal year 2024 to $250 million, up from the earlier estimate of $200 million, and expects these revenues to double to $500 million by fiscal year 2025.
Citi and Truist Securities have both updated their price targets for TE Connectivity, with Citi raising the target to $160 from $156 and Truist Securities raising it to $156 from $151. Both firms maintained a neutral stance on the stock.
Citi anticipates that TE Connectivity can achieve mid-single-digit growth into fiscal year 2025, driven by an increase in automotive content, the momentum of AI, and expansion in the energy, medical, and aerospace sectors.
Lastly, TE Connectivity expressed potential interest in future mergers and acquisitions that align with its markets and technologies. The company anticipates a 9% rise in adjusted EPS for the fourth quarter and projects double-digit earnings growth for the full fiscal year. These are among the recent developments for TE Connectivity.
InvestingPro Insights
As Wolfe Research projects a bright future for TE Connectivity (NYSE:TEL), real-time data and InvestingPro Tips reinforce the optimistic outlook. TE Connectivity's management has been proactive in enhancing shareholder value, as evidenced by their aggressive share buyback strategy. Additionally, the company has a strong track record of rewarding investors, having raised its dividend for 14 consecutive years, a testament to its financial stability and commitment to shareholders.
InvestingPro Data highlights that TE Connectivity has a market capitalization of $44.88 billion and trades at a P/E ratio of 13.07, indicating that the stock may be undervalued relative to near-term earnings growth. The company's PEG ratio, standing at 0.18, further suggests that the stock could be a compelling investment when considering its growth prospects. With a consistent dividend yield of 1.76%, TE Connectivity appeals to income-focused investors, especially when combined with a dividend growth of 10.17% over the last twelve months.
Moreover, the company is not only a prominent player in the Electronic Equipment, Instruments & Components industry but also demonstrates financial prudence with its moderate level of debt and cash flows that can sufficiently cover interest payments. For investors seeking additional insights, there are numerous other InvestingPro Tips available, providing a comprehensive analysis of TE Connectivity's financial health and market performance.
For those interested in a deeper dive into TE Connectivity's investment potential, more InvestingPro Tips can be found at https://www.investing.com/pro/TEL, offering valuable guidance for making informed decisions.
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