The first-quarter earnings reporting onslaught will begin in full force next week, and given the volatility in the markets, you can bet that companies that either miss estimates or give bad forward guidance can look for a trip to the proverbial woodshed, as multiples are very stretched. Despite the volatility and wild market swings of the past two months, most are expecting solid results from the tech sector.
With technology looking good for the quarter, suppliers to the top companies should be sitting in a very good position to post solid results and give good forward guidance. A new research report from Stifel echoes that sentiment:
Our checks with supplier and distribution contacts point to another strong quarter for component/connector suppliers. Underlying demand remains strong heading into Q2, particularly across the broader industrial markets, automotive, and some pockets of datacom. This is offset somewhat by incremental weakness in mobile devices on Apple inventory reductions and continued weakness in telecom infrastructure. Component lead times remain extended on dozens of passive components (capacitors, resistors) and certain commodity semis, but for the most part remain stable.
While some of the Stifel top picks have actually outperformed the S&P 500 year to date, the valuations have become more reasonable, and the firm suggests investors buy the shares of these three top picks in front of earnings.
This award-winning company looks poised to come in strong for the quarter. Arrow Electronics Inc. (NYSE: ARW) is a worldwide provider of products, services and solutions to industrial and commercial users of electronic components and enterprise computing solutions.
The company has over 800 suppliers and 100,000 customers, which include original equipment manufacturers, contract manufacturers and commercial customers in 83 countries. Arrow Electronics operates in two business segments — Global Components and Global Enterprise Computing Solutions — which accounted for 67% and 33%, respectively, of sales.
The Stifel team is very positive on the quarter and raised its earnings for the quarter and the full year. The target price reflects the company trading at 10.5 times the year’s earnings estimate.
The Stifel price target for the stock is $92, and the Wall Street consensus figure is $89.60. Shares closed Wednesday’s trading at $76.66.
This top stock has backed up nicely and is offering a very good entry point. Sensata Technologies Holding N.V. (NYSE: ST) is one of the world’s leading suppliers of sensing, electrical protection, control and power management solutions with operations and business centers in 16 countries.
Sensata makes products that improve safety, efficiency and comfort for millions of people every day in automotive, appliance, aircraft, industrial, military, heavy vehicle, heating, air-conditioning and ventilation, data, telecommunications, recreational vehicle and marine applications.
The company has two business segments. Performance Sensing manufactures automotive, commercial and industrial sensors, including pressure sensors, pressure switches, position and force sensors. Sensing Solutions manufactures bimetal electromechanical controls, thermal and magnetic-hydraulic circuit breakers, power inverters and interconnection products for the industrial, commercial, aerospace, military and residential end-mark.
Stifel has a $63 price target, and the consensus target is $58.64. The stock closed trading on Wednesday at $52.99.
This stock is down almost 10% in the last month. TE Connectivity Ltd. (NYSE: TEL) designs and manufactures products at the heart of electronic connections for the world’s leading industries, including not only automotive but energy and industrial, broadband communications, consumer devices, health care and aerospace and defense. TE has a long-standing commitment to innovation and engineering excellence, which helps its customers solve the need for more energy efficiency, always-on communications and ever-increasing productivity demands.
TE Connectivity is the world’s largest maker of passive electronic components (75% of sales) led by a leading share (20% to 25%) in connectors (50% of sales). The company’s biggest served markets have longer cycles, such as auto (30% of sales) and telecom equipment (19% of sales). TE also produces components for telecom and energy networks (14% of sales) that protect/connect cabling.
Many on Wall Street are bullish on the stock due to the increasing electronic content in automotive, industrial, consumer and defense industries. Analysts cite the stocks very reasonable valuation and the high-growth auto sensor business helping to ramp up sales and earnings.
The $115 Stifel price target compares with the $113.93 consensus target. The stock was last seen at $98.72 a share.
These are three top companies that all could come out with stellar first-quarter results. It may make sense to buy partial positions in front of the earnings on the outside chance that they either miss or guidance is a touch light.