Report
Seth Sherwood
EUR 850.00 For Business Accounts Only

Morningstar | Amphenol’s Record Setting Continues, but For How Long?; Maintaining $84 FVE

Amphenol delivered another strong quarter with record revenue and adjusted earnings per share exceeding prior guidance. However, while management’s fourth-quarter revenue outlook was above our estimates, the guidance is for a slight sequential decline in revenue which is uncharacteristic of the firm’s average fourth-quarter performance. We believe this points to a slightly softer landing in 2019, roughly in line with what we have heard from other component and chip suppliers with significant industrial exposure. We are maintaining our fair value estimate of $84 for narrow-moat Amphenol. While shares are currently fairly valued, in our view, we would be interested buyers in the stock if a pullback in price were to materialize. We believe Amphenol will continue to benefit from growing electronic content and increased connectivity and that management will continue to identify, acquire, and integrate additive firms.

Revenue in the third quarter grew by 16% year over year and 7% sequentially to $2.13 billion, well ahead of guidance and our forecast. The firm realized sales increases through its recent (and ongoing) acquisition activities but most impressive was that organic growth continued across the diverse end-markets that Amphenol serves. However, the reported book/bill ratio of 1 suggests that demand is still strong, but moderating from prior quarters. Sales in the interconnect segment grew 17% year over year while cable products were flat with the prior-year period. Adjusted operating margin set another record at 20.9% with operating margin in Amphenol’s interconnect segment more than offsetting any stagnation in smaller cable segment. The much larger interconnect segment had an operating margin of 22.7% in the quarter which suggests the firm has thus far had limited impact from tariffs or that it has effectively mitigated the effects. Adjusted earnings for grew by 20% year over year to $0.99 per share.

By end market, military sales continued robust growth, recording a year-over-year increase of 23% as a result of widespread demand for aircraft, space, and communications products. Automotive product sales decreased sequentially by 4%, leading management to slightly lower the outlook for full-year sales from the automotive market. As a result, we’ve lowered our full-year outlook for end market, and now expect 13% growth versus our prior estimate of 19%. While we reiterate our long-term forecast of continued electronic content increases throughout the automotive market, and for Amphenol’s portfolio of interconnect, sensor and antenna products to benefit, near-term demand weakness has also caused us to materially lower our forecast for automotive connector sales in 2019.

However, the short-term decline in the automotive market has been more than offset by strong demand in other end markets, particularly in mobile devices which grew by 72% sequentially and is now anticipated to grow by 30% for the full year. This is far ahead of the previous guidance for midteen sales growth, as demand for smartphone products was greater than expected.

Management expects a slight sequential decline in sales for the fourth quarter, totaling $2.08 billion at the midpoint of guidance. This would imply quarterly revenue growth of 7% year over year because of stronger-than-expected demand from certain end markets. Adjusted earnings per share are expected to increase by 8% versus the prior-year period to $0.96. While all guidance assumes no further disruption from geopolitical saber-rattling or increased tariff activity, thus far Amphenol’s team has done well to mitigate these factors and we expect that to continue into the fourth quarter.
Underlying
Amphenol Corporation Class A

Amphenol is a designer, manufacturer and marketer of electrical, electronic and fiber optic connectors and interconnect systems, antennas, sensors and sensor-based products and coaxial and high-speed cable. The company's segments are: Interconnect Products and Assemblies, which designs, manufactures and markets a range of connector and connector systems, and other products, including antennas and sensors, used in a range of applications in a set of end markets; and Cable Products and Solutions, which designs, manufactures and markets cable, products and components for use primarily in the broadband communications and information technology markets as well as certain applications in other markets.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Seth Sherwood

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