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TE Connectivity (TEL) Q2 Earnings: A Beat in the Cards?


TE Connectivity Ltd. TEL is scheduled to report second-quarter fiscal 2017 results, before the opening bell on Apr 26.

The company has an excellent earnings surprise history, with an average positive surprise of 6.7% for the trailing four quarters. TE Connectivity scored its fifth consecutive earnings beat in the last reported quarter, beating estimates by 15%.

Let's see how things are shaping up for this announcement and whether TE Connectivity is set to add yet another earnings beat to its winning streak.

Factors to Consider

TE Connectivity, a market leader in the connectivity and sensor business, is armed with a comprehensive portfolio that supplements its strength. About 80% of the company’s revenues are driven by harsh environment applications. For the past five years, the company’s harsh business applications have been experiencing mid-single digit growth, bolstering revenues. We believe that the stellar traction of harsh environment applications will continue to support the top-line and margin growth for second-quarter fiscal 2017.

The company is currently experiencing steady momentum and expects most of its businesses to continue gaining traction in the forthcoming quarters. In addition, all three segments of the company, namely Transportation, Industrial and Communications businesses are expected to act as key profit churners for the quarter to be reported. In addition, robust expansion in the heavy truck market, especially in Asia, is likely to stoke the growth of the Commercial Transportation business.

Further, the communications segment has bright prospects and is estimated to grow in low-single digits. Especially, SubCom is anticipated to remain as one of the strongest growth drivers, with its $1-billion backlog, benefiting from the build-out of the cloud.

Over the past year, strategic acquisitions gave TE Connectivity a leading position in solutions for the minimally-invasive medical market, fortified its portfolio of industrial connectors and bolstered the company’s offering of sensors for the auto market. We believe that the previously completed acquisitions, including AdvancedCath, Measurement Specialties and Creganna, will also propel the company’s revenues substantially in the to-be reported quarter.

However, foreign exchange volatility remains a formidable risk.

TE Connectivity appreciated 5.1% in the past three months, underperforming the Zacks categorized Electronics-Miscellaneous Components industry’s average of 11%.

Sluggishness in oil and gas markets, and its derivative impact on other industrial markets will likely act as strong headwinds for TE Connectivity. During the last reported quarter, Oil and Gas experienced a 24% plunge in sales due to the end market conditions. Also, low prices in oil & gas markets are reducing sales in industrial equipment business, as well as areas like factory equipments and rail. Helicopter demand has also been adversely affected, which can prove to be a drag on the company’s aerospace business. These factors will hurt the company’s results in quarter under review as well.

We believe that currency fluctuations remain a risk to the company’s top line in the quarter under review as well. In fact, for second-quarter fiscal 2017, TE Connectivity anticipates foreign currency fluctuations to impact sales by $60 million and EPS by 3 cents, on a year-over-year basis.

TE Connectivity Ltd. Price, Consensus and EPS Surprise

Earnings Whispers

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

Zacks ESP: Earnings ESP for the company is currently pegged at 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $1.07.You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: TE Connectivity has a Zacks Rank #2, but the company’s ESP of 0.00% reduces the chances of a positive earnings surprise.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions

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:

The Chemours Company CC has an Earnings ESP of +4.08% and a Zacks Rank #1. The company is expected to release earnings around May 1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Chesapeake Energy Corp. CHK has an Earnings ESP of +31.58% and a Zacks Rank #3. The company is expected to release earnings around May 4.

CAN Financial Corporation CNA has an Earnings ESP of +10.13% and a Zacks Rank #3. The company is expected to release earnings around May 1.

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