On Thursday, HSBC issued a downgrade for TE Connectivity (NYSE:) stock, moving its rating from Hold to Reduce, and simultaneously lowered the price target to $137 from $156. The revision comes in the wake of observed weaknesses in the company’s transportation and industrial segments.
The transportation solutions segment of TE Connectivity experienced a revenue decline of approximately 15%, with a year-over-year drop of 4% in the fourth quarter of fiscal year 2024. All key subsegments, including automotive, commercial transportation, and sensors, reported declines in the same period, with automotive down by 3%, commercial transportation by 4%, and sensors by a significant 11%.
The industrial segment of TE Connectivity did not fare much better, prompting HSBC to reduce its revenue forecasts for this area by roughly 5%. A persistent decrease in the revenue-to-capital expenditure ratio across various regions has indicated that the previously anticipated temporary weakness due to destocking might, in fact, be a more enduring issue.
However, there is a silver lining for TE Connectivity in the communications subsegment, where HSBC is increasing its revenue forecasts by about 9%. This uptick is attributed to robust demand related to artificial intelligence, which has led to a notable 36.8% year-over-year increase in new orders during the fourth quarter, even though there was a sequential dip.
The downgrades and revised forecasts reflect HSBC’s reevaluation of TE Connectivity’s performance and outlook in specific market segments, with the communications subsegment providing a solitary area of growth amidst broader challenges.
In other recent news, TE Connectivity reported robust financial results for the fourth quarter and fiscal year 2024. The company’s Q4 sales saw a 2% year-over-year increase, reaching $4.1 billion, and a 10% rise in adjusted earnings per share (EPS) to $1.95. For the full fiscal year, sales were recorded at $15.8 billion with an adjusted EPS of $7.56, indicating a 12% increase. Additionally, the company announced a noteworthy $2.5 billion expansion in its share repurchase program.
TE Connectivity also introduced a new 2-segment structure, merging Transportation and Industrial Solutions. The company’s Communications segment, particularly AI applications, is projected to see sales double in fiscal 2025. For Q1 fiscal 2025, sales are anticipated to be $3.9 billion, with adjusted EPS of $1.88.
Moreover, TE Connectivity forecasts growth in aerospace, defense, and renewable energy sectors, with a favorable market for acquisitions. However, the company plans to exit certain areas of the Sensors business, impacting revenues by around $50 million in FY 2025. Despite these recent developments, TE Connectivity maintains a positive outlook for FY 2025.
InvestingPro Insights
While HSBC has downgraded TE Connectivity, InvestingPro data and tips offer a more nuanced perspective on the company’s financial health and market position. Despite the challenges in the transportation and industrial segments highlighted by HSBC, TE Connectivity maintains a strong market cap of $46.13 billion and trades at a relatively modest P/E ratio of 14.76.
InvestingPro Tips reveal that TE Connectivity has raised its dividend for 14 consecutive years, demonstrating a commitment to shareholder returns even in challenging market conditions. This is further supported by a current dividend yield of 1.71% and a notable dividend growth of 10.17% over the last twelve months. These factors may provide some reassurance to investors concerned about the company’s recent segment performance.
Additionally, the company’s stock is trading near its 52-week high, with a robust 31.04% price total return over the past year. This suggests that the market may be taking a more optimistic view of TE Connectivity’s prospects than the recent downgrade implies.
For investors seeking a deeper understanding of TE Connectivity’s potential, InvestingPro offers 11 additional tips, providing a comprehensive analysis of the company’s financial health and market position.
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