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Morningstar | Amphenol Guides Down After Solid First Quarter; Maintaining $84 Fair Value Estimate

Interconnect giant Amphenol reported decent first-quarter results. The firm’s broad end-market exposure was again on display with double-digit sales growth in several areas. However, management also lowered revenue and earnings expectations for the year as a result of automotive weakness and steep declines from mobile device-related sales. As a result, we are maintaining our current outlook and $84 fair value estimate. We continue to believe the narrow-moat firm is exposed to several positive secular growth trends but struggle to justify the current market valuation. We acknowledge the firm’s exceptional leadership and quality earnings but would advise investors wait for a pull-back before building a position.

Sales in the first quarter increased nearly 5% year over year and were down 12% sequentially to $1.96 billion. Part of the growth was a result of the addition of recently acquired SSI Control Technologies. SSI’s sales helped to buoy revenue in automotive and industrials, which grew 2% and 5% on a sequential basis, respectively. Military and defense sales grew at 16% year over year to 11% of sales or roughly $215 million in the quarter while commercial aerospace also grew in the mid-teens, albeit from a lower base. Management increased the full-year outlook for both markets as result of the continued traction. By contrast, mobile devices experienced sizable losses, down 10% versus the prior year and 50% sequentially. While a steep sequential decline was not surprising after the outsized growth shown in the fourth quarter of 2018, management was clear that its lowered full-year outlook was in large part a result of diminished expectations for the end-market on account of product architecture changes reducing the firm’s expected content in some upcoming devices. Adjusted operating margin contracted 10 basis points to 20.1% while earnings per share grew by 7% to $0.89.

Management’s updated guidance now anticipates full-year sales between $8.13 billion and $8.25 billion, a downward revision of roughly 1% from midpoint to midpoint. Adjusted earnings per share are also expected to be lower at $3.84 versus the prior estimate of $3.92. This is due to a combination of factors, including the lower revenue but also the impact of acquisitions, SSI and the recently announced purchases of Charles Industries and Aorora (with the latter two costing $200 million and anticipated to add an additional $140 million), which are coming in with profitability below the company average.