The 'Recovery Has Been Faster Than Expected,' Says an Industrial Components CEO - Barron's

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TE Connectivity CEO Terrence R. Curtin

Courtesy of TE Connectivity

The recovery in the global industrial economy is well under way, as evidenced by numbers reported Wednesday by industrial component supplier TE Connectivity.

The sensors and connectors company saw particularly strong rebounds in China and in auto demand across the globe, but the improvements were broader than just that. Management sees a full recovery in its business by the end of 2020.

TE Connectivity (ticker: TEL) crushed Wall Street expectations for its fiscal fourth quarter. (TE’s fiscal year-end is in September.) The company earned $1.16 a share from $3.2 billion in sales. Analysts were looking for 87 cents in per-share earnings from $2.9 billion in sales.

It’s quite an improvement from the previous quarter. TE earned 59 cents a share from $2.5 billion in sales during the quarter ended in June. Still, earnings and sales haven’t recovered from pre-Covid levels. A year ago, TE earned $1.33 a share from $3.3 billion in sales.

“We thought we would start seeing a rebound [in the latest quarter] after parts of the world had been shut down due to Covid,” TE Connectivity CEO Terrence Curtin tells Barron’s. “That recovery has been faster than we expected. But clearly there are markets that are still not back to pre-Covid levels.”

The biggest driver of TE’s fiscal fourth-quarter beat was a rapid recovery in global auto demand, says Curtin. Units produced rose to 19 million last quarter, from 12 million in the calendar second quarter. The company had been expecting production of about 17 million. Those figures compare with roughly 21 to 22 million units a quarter pre-Covid.

TE sells connectors and sensors to auto makers, which power electronic features in cars and trucks. More units produced means more parts sold by TE. But the long-term shift to more hybrid and battery-powered vehicles is also increasing the number of components per vehicle.

“EV is still growing,” said Curtin, even as the overall automotive sales fell. “That proves a trend.” TE believes hybrid and electric vehicle sales will hit 20 million by 2025, representing average annual growth of roughly 23%.

Another growth product area in the latest quarter and over the long term for TE has been components used in data centers and communications networks. That’s been an area that has seen sales increase during the pandemic, as demand for cloud computing and other related services has surged. TE’s communications segment actually grew about 15% year over year in the just-completed second half of its fiscal 2020.

TE’s health care segment was more of a mixed bag. Its biggest customers are medical-device makers like Boston Scientific (BSX), Medtronic (MDT), or Edwards Lifesciences (EW). Fewer elective procedures during the pandemic mean less business for TE, partially offset by higher sales of connectors used in ventilators and other equipment used to treat Covid patients. Curtin says he expects more elective procedures to come back in 2021.

Aerospace is another depressed part of TE’s portfolio and the global industrial economy. The pandemic has hammered aerospace demand. Commercial air travel demand in the U.S. was down about 60% as of this past Sunday. Aerospace only accounted for roughly 5% of TE sales in 2019. The business is down about 20% in 2020 and Curtin doesn’t think it will rise in fiscal year 2021 either.

That’s some bad news. But China’s economy has recovered from pandemic-induced lockdowns much faster than European countries or the U.S. That’s good news for TE and other industrial stocks. TE’s Chinese orders grew 25% year over year across all segments last quarter.

On top of its fiscal fourth quarter beat, TE added a better-than-expected guidance for the remaining three months of 2020. Management sees $3.2 billion in sales and adjusted EPS of $1.25 in the first quarter of TE’s fiscal 2021. That would represent a full recovery from the pandemic impact, with sales about even year over year and earnings per share up four cents.

Year to date, TE stock has returned about 9% including dividends, versus a 3% loss for the Industrial Select Sector SPDR ETF (XLI). The S&P 500 has returned 7% and the Dow Jones Industrial Average has lost 1%.

The company hosts a conference call for analysts and investors at 8:30 a.m. Eastern time.

Write to Nicholas Jasinski at nicholas.jasinski@barrons.com and Al Root at allen.root@dowjones.com

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