Al Root

TE Connectivity isn't a household name, but it touches a host of topics and industries investors care about, ranging from electric vehicles to artificial intelligence.

It beat Wall Street earnings estimates for its fiscal first quarter. More important, its outlook is solid -- and that outlook is a useful read-through for many other companies.

Wednesday morning, TE reported fiscal first-quarter adjusted earnings per share of $1.95 from sales of $3.84 billion. Wall Street was looking for per-share earnings of $1.89 from sales of $3.9 billion.

Sales were a touch light, but new orders came in at $4 billion, above sales. More orders than sales is a good sign.

For the fiscal second quarter, TE expects to generate EPS of $1.96 from sales of $3.95 billion. Wall Street is looking for $1.98 and $4.1 billion, respectively.

Guidance is a little light, but TE always guides conservatively. The company hasn't missed its guidance since 2015. The average "beat" since then is about eight cents a quarter.

What's more, foreign currency is a significant headwind. Second-quarter guidance includes about 6 cents to account for a stronger dollar. Roughly two-thirds of TE's business is outside the U.S. When the euro is weak it pressures U.S. dollar-denominated financial statements.

There isn't much TE can do about global currency fluctuations. It already manufactures and sells regionally to minimize any impact on profit margins.

Outside of currency translation, there were many encouraging signs for investors. For starters, its AI-related business should be roughly $600 billion in its fiscal year 2025, up about 100% compared with fiscal year 2024.

TE's AI business relates, unsurprisingly, to connectivity. Nvidia's chips have to plug into things. TE makes the connectors.

The AI business is booming. Investors in stocks ranging from Nvidia to data center infrastructure provider Vertiv will be happy with that.

The industrial automation isn't booming. Industrial manufacturing activity has been relatively weak for two-plus years, impacting companies such as Rockwell Automation. TE says those end markets are stabilizing -- good news after a long period of lackluster demand characterized by distributors working down inventories.

TE is also a significant auto supplier. It expects global car production -- which is roughly 86 million vehicles -- will fall a little in 2025. That isn't great news, but more electrified vehicles will be made, rising from about 23 million units to 27 million units globally. Most of that production is in Asia.

That figure includes plug-in hybrid vehicles. TE sells electrical connectors and has more content on a vehicle with an electric motor and batteries than on a traditional gasoline-powered car. Expected EV growth is a positive for parts suppliers and EV makers with Asian exposure including Tesla and China's BYD.

Some industries are doing better than others, but on balance, things look OK. Tariffs don't look like they will upend any industry significantly. "We're going to do the same playbook we did in 2017," says CEO Terrence Curtin. That includes working with customers to adjust production or pricing. TE has about 130 factories worldwide.

The 2017 impact amounted to about $300 million, Curtin adds. That amounted to about 2% of reported sales -- something to manage, but it appears manageable.

Coming into Wednesday's trading, TE stock was about 11% year to date. That trails the S&P 500 by about 14 percentage points, but it's still positive. TE has been able to offset sales growth weakness by managing costs effectively.

Over the past few years, while sales growth has decelerated, operating profit margins have expanded from roughly 17%, before the pandemic, to about 19%.

That is another reason for optimism. Margins can improve further when sales growth improves and TE has more volume flowing through its 130 facilities.

Write to Al Root at allen.root@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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January 22, 2025 06:02 ET (11:02 GMT)

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