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Morningstar | Amphenol Finishes a Record Year but Guides to Weaker 2019; Maintaining $84 FVE

Narrow-moat Amphenol announced fourth-quarter earnings that exceeded our expectations for both revenue and profitability despite management previously guiding for a slightly weaker fourth quarter. While guidance for the upcoming quarter suggests a steep revenue decline, the firm’s broad and diverse revenue stream has thus far kept it from being buffeted too severely by a stalling automotive market and quarrelsome trade relations. Shares traded up 3% on the firm’s record-breaking quarter and are approaching our unchanged fair value estimate of $84 per share. We reiterate that despite near-term uncertainty in the global economic environment, the trends around electrification and connectivity continue to provide ample opportunities for Amphenol to win sockets in programs steeped with switching costs.

Revenue in the fourth quarter grew by 14% year over year and 4.5% sequentially to $2.23 billion. Sales in the interconnect segment grew by 15% year over year while the much smaller cable products segment (now less than 5% of total revenue) grew by 12% over the same period. Sales were broad-based, with no end market accounting for more than 20% of revenue in the quarter, but mobile devices, networking, and IT data communications all performed well. While market dialog in the fourth quarter surrounded a flattening smartphone market, Amphenol’s mobile device sales increased by 47%, year over year, during the period amid very strong demand for the firm’s smartphone-related products. IT datacom also performed well, growing 15% year over year during the quarter. That said, Amphenol reported a book/bill ratio of 0.99, down from the previous quarter of 1, indicative of some hesitancy from customers amid an uncertain macro environment.

Adjusted operating margin expanded by 40 basis points year over year to a record 21% due to strong performance from the interconnect segment. Adjusted earnings during the quarter were $1.05 per share after removing the benefit from tax changes.

Management is currently forecasting a revenue decline of roughly 14% sequentially to $1.9 billion at the midpoint of guidance. While this would still represent roughly 2% growth year over year, this unseasonal slowdown is due the mobile device segment returning to more normal levels after greater-than-expected demand in the fourth quarter. Amphenol’s management also expect minimal revenue contribution from the recently completed acquisition of sensor firm SSI. While the firm is unlikely to be margin-accretive in the near term, it is expected to add $180 million in annual revenue and further bolster the firm’s sensor capabilities, particularly in the factory automation market. Adjusted earnings per share are expected to increase in excess of revenue growth by more than 4% year over year to $0.87.