TE Connectivity Ltd

TEL: NYSE

TE Connectivity engages in the design and manufacturing of connectors and sensors for a variety of industries.[1] It was spun off from Tyco in 2007, but its connectivity business has been around since 1941.[2]

Investment thesis

We believe that TE Connectivity has undergone a transformation as a company since 2010. Further it is our view that the new TE Connectivity has secular trends[3] in its favor. We also are of the opinion that their industrial segment should rebound, thanks to their medical solutions, and that their communications equipment business will continue to grow. Finally, we think that margin expansion should continue going forward.

Confirmation through research

Since 2010 the company has transformed as they made 14 acquisitions, while divesting over $5 billion in revenues.[4] The company is now the dominant player in automobile connectors, and has 3 main segments focused on transportation, industrial, and communication solutions.[5] We believe the transformed TE Connectivity will benefit from secular trends as industries go toward safer products, more connected devices, and products that are better for the environment. Further we believe that they will benefit from the trend toward greater content[6] across an array of solutions across industries, leading to 5% to 7% organic growth. We believe automobile dollar content for TE will continue to grow. The current dollar content per vehicle for TE Connectivity is $62, and will climb to $82 by 2020.[7] In terms of margin opportunity, the company has 17.5% operating margins, which is currently is below peers.[8] However we believe thanks to cost cutting and productivity enhancements, they will grow margins to levels closer to peers.[9] Finally, TE Connectivity has grown the dividend at 15% per year for the last 5 years,[10] and the capital allocation plan is to return 2/3rd’s of free cash flow to shareholders.[11]

Variant Perception

We believe that the market is not assigning a fair value to the business considering the transformation, the secular growth trends their segments are facing, the margin expansion opportunity, and the management’s capital allocation. We believe the multiple should re-rate over time as the company executes on its targets over the next few years.