TE Connectivity (TEL), formerly Tyco Electronics, makes over 500,000 products that connect and protect the flow of power and data inside various products. It’s the strongest player in an important space — and I’ve identified an intriguing options trade in the name.
TE Connectivity today notched a fresh 52-week high, but I still see serious upside potential from here. Here’s why:
1. Best Player in a Hot Space
The move by Koch Industries to acquire rival Molex Incorporated (MOLX) for $38.50 a share (a 31% premium) suggests that this niche area of electrical component manufacturing could become very hot. The Molex takeout shows there is real demand for these connector players — this is an area where serious money can be made.
There are several reasons that TE Connectivity is better than its rivals:
- Better business: TE Connectivity is a much stronger company than Molex — it caters to stronger end-markets. The company gets its biggest chunk of sales (40%) from the booming auto industry, followed by the improving networking and industrial markets. TEL also sports stronger (and expanding) profit margins.
- Global outlook: A third of the company’s business comes from Europe — with the European economy improving, I see a major source of upside for some time.
- Valuation: Compared to rival Amphenol (APH), TE Connectivity is cheap. Amphenol trades at 18.7 times next year’s earnings estimates with a 12.65% growth rate. TE Connectivity sells for just 14.4 times next year’s numbers with a slightly higher long-term growth rate of 12.73%.
2. Technicals Are In Place
TEL stock trades a good volume of daily shares and is channeling upward. The 50-day moving average of $48.57 and 200-day at $43.23 stand to offer support on any move lower.
3. Earnings Look Fine
TE Connectivity last posted its quarterly earnings results on July 24. The company reported $0.88 earnings per share for the quarter, beating the analysts’ consensus by a nickel. Revenue of $3.45 billion outpaced the consensus estimate of $3.39 billion.
A year prior, the company posted $0.79 earnings per share. The company’s quarterly revenue was down 1.4% on a year-over-year basis.
On average, analysts predict that TE Connectivity will post $3.19 earnings per share for the current fiscal year.
4. Smart Money Likes TEL
Heading into Q3, many hedge funds increased their long positions in this stock since the first quarter. With the smart money’s capital changing hands, a few notable hedge fund managers were upping their holdings considerably.
Harris Associates had the most valuable position in TE Connectivity, worth close to $1.2 billion, accounting for 2.5% of its total 13F portfolio. Pzena Investment Management had a $409.5 million position; the fund has 2.7% of its 13F portfolio invested in the stock.
As of the second quarter, former Berkshire Hathaway (BRK.B) investor Lou Simpson held 0.83% of TEL shares outstanding, currently valued at $158.6 million, a major portion of his portfolio.
5. Analysts Back TE Connectivity
A number of research firms have recently commented on TEL. Analysts at RBC Capital raised their price target on shares of TEL to $55 from $57 and now have an “outperform” rating on the stock. Bank of America reiterated a “hold” rating and has a $43 price target on the stock.
TE Connectivity has potential to go a lot higher. With the global economy finally returning to growth mode, a connector company is exactly the type of industrial company that will provide a profitable options trade.
Looking at the April 2014 call side of the option chain, the call contract at the $50 strike price originally had a current bid of $2.60. TEL shares have really soared, and this strike has increased dramatically. However, it has left a major gap in price variations and the $55 strike price is looking good — the premium is much lower and is likely to explode upward as well.
OPTIONS TRADE: Buy the TEL Apr 2014 55 call (TEL140419C00055000) at or under $2.40, good for the day. Place a protective stop limit at $0.95 and a predetermined sell at $3.85.
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