Is TE Connectivity (TEL) a Great Stock for Value Investors?

Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put TE Connectivity Ltd. TEL stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, TE Connectivity has a trailing twelve months PE ratio of 18.27, as you can see in the chart below:

 

This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 20.15. If we focus on the long-term PE trend, TE Connectivity’s current PE level puts it above its midpoint over the past few years, with the number having risen rapidly over the past few months.

 
Further, the stock’s PE also compares pretty favorably with the Zacks classified Electronic-Miscellaneous Components industry’s trailing twelve months PE ratio, which stands at 29.16. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.

 
We should also point out that TE Connectivity has a forward PE ratio (price relative to this year’s earnings) of just 17.28, so it is fair to say that a slightly more value-oriented path may be ahead for TE Connectivity stock in the near term too.

P/CF Ratio

An often overlooked ratio that can still be a great indicator of value is the price/cash flow metric. This ratio doesn’t take amortization and depreciation into account, so can give a more accurate picture of the financial health in a business.This is a preferred metric to some valuation investors because cash flows are (a) generally less prone to manipulation by the company’s management and (b) are less affected by variation in accounting policies between different companies.

The ratio is generally applied to find out whether a company’s stock is overpriced or underpriced with reference to its cash flows generation potential compared with its competitors. However, it is not commonly used for cross-industry comparison, as the average price to cash flow ratio varies from industry to industry.

In this case, TE Connectivity’s P/CF ratio of 10.12 is higher than the Zacks classified Electronic-Miscellaneous Components industry average of 13.43, which indicates that the stock is undervalued in this respect.

 
Broad Value Outlook

In aggregate, TE Connectivity currently has a Zacks Value Style Score of ‘B’, putting it into the top 40% of all stocks we cover from this look. This makes TE Connectivity a good choice for value investors, and the above metrics make this pretty clear too.

What About the Stock Overall?

Though TE Connectivity might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘C’ and a Momentum score of ‘D’. This gives TEL a Zacks VGM score—or its overarching fundamental grade—of ‘B’. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been mixed at best. The current quarter has seen no upward estimate revisions in the past sixty days compared to one downward, while the full year estimate has seen one up and none down in the same time frame.

This has had just a small impact on the consensus estimate though as the current quarter consensus estimate has risen by 0.9% in the past two months, while the full year estimate has remained stable. You can see the consensus estimate trend and recent price action for the stock in the chart below:

TE Connectivity Ltd. Price and Consensus

TE Connectivity Ltd. Price and Consensus | TE Connectivity Ltd. Quote

This somewhat favorable trend is why the stock has just a Zacks Rank #2 (Buy) and why we are looking for better performance from the company in the near term.

Bottom Line

TE Connectivity is an inspired choice for value investors, as it is hard to beat its good lineup of statistics on this front along with a good Zacks Rank. However, with a sluggish industry rank (Bottom 45% out of more than 250 industries), it is hard to get too excited about this company overall. In fact, over the past two years, the Zacks Electronic-Miscellaneous Components industry has clearly underperformed the broader market, as you can see below:

 
So, value investors might want to wait for broader factors to turn around in this name first, but once that happens, this stock could be a compelling pick.

The Best Place to Start Your Stock Search

Today, you are invited to download the full list of 220 Zacks Rank #1 "Strong Buy" stocks – absolutely free of charge. Since 1988, Zacks Rank #1 stocks have nearly tripled the market, with average gains of +26% per year. Plus, you can access the list of portfolio-killing Zacks Rank #5 "Strong Sells" and other private research. See these stocks free >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
TE Connectivity Ltd. (TEL): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research