Last September I recommended buying the company, TE Connectivity Ltd (TEL, Financial), a $27.69 billion market cap company, which is a company that designs, manufactures and markets engineered electronic components and network solutions for the automotive, appliances, aerospace and defense, telecommunications, computers and consumer electronics industries.
In this article, let´s see if it had been a good decision, when at that time the price was at $60.44.
Realized and expected return
In September, Yahoo! (YHOO, Financial) Finance estimated a one-year target share price is $68.91. The actual closing price is at $69.56, so the projected one-year return of 14% that we have calculated at that time, was reached in nine months. The new one-year target price is $77.64, so the expected return will be 11.6% from price appreciation.
In addition, for holding the stock one year you'll be paid a dividend of $0.33 per share each quarter, totaling $1.32 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on an investment for a stock, and in this case is 1.9%. So the total expected return for investing in TE is 13.5%, which we believe is an attractive stock return.
Fund's positions
Jean-Marie Eveillard´s First Eagle Investment (Trades, Portfolio) Management is the second-major shareholder of the company after reducing by 2% to $307.9 million and 4.3 million shares. Richard S. Pzena´s decreased his stakes in the company by 41%. The stake is now worth $68.7 million with 960,228 shares.
In the first quarter, the sentiment was bearish; I mean there were much funds taking shorter than taking long positions.
Long Positions: Caxton Associates (Trades, Portfolio) and First Pacific Advisors (Trades, Portfolio).
Unchanged: Steven Romick (Trades, Portfolio) and Bill Nygren (Trades, Portfolio).
Short Positions: Joel Greenblatt (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Steven Cohen (Trades, Portfolio), HOTCHKIS & WILEY, Mario Gabelli (Trades, Portfolio), Dodge & Cox, Pioneer Investments (Trades, Portfolio), Jim Simons (Trades, Portfolio), Robert Olstein (Trades, Portfolio), Richard Pzena (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio).
In the next table we have all the details.
According to the returns obtained above and considering that in the first quarter the stock returned 13.23%, I wouldn’t have taken a short position.
Investments
In the past, the company was analyzing internal processes and structures and making huge investments in restructuring, in search of better productivity and margin expansion or stabilizing them. For example, the firm exited from non-strategic or low-margin businesses, while moving production to low-cost regions, such as China. Further, it has also reorganized its business segments.
It is the biggest player in the sub-industry, and we think certain actions like continuing investing in R&D will help it maintain its leader position.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 13.23x, trading at a discount compared to a median of 18.5x for the industry. To use another metric, its price-to-book ratio of 3.08x indicates a premium versus the industry median of 1.57x while the price-to-sales ratio of 2.06x is above the industry median of 0.96x. Because the stock price is close to a ten year high, P/B and P/S are also high.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $26,463, which represents a 21.5% compound annual growth rate.
Final comment
We believe the company will continue growing due to its organic growth helped by its investments in new lines and a greater products mix. Also, strategic acquisitions like the one of ADC Telecommunications or the acquisition of Deutsch Group.
Further, the management is targeting long-term revenue growth of 5% to 7%, doubling the last three-year average.
With a great exposure to the transportation sector, the company is trying to diversify its business model, but transportation will continue to be a key driver.
In my opinion, the realized and expected return of the company creates an opportunity to initiate an investment in this stock. So I would recommend, as I did in September 2014, to consider TE Connectivity as an option for your portfolio.
Disclosure: Omar Venerio holds no position in any stocks mentioned
