Amphenol Corporation: Connecting Our Future

In 1979 James Burke a British broadcaster, science historian, author and television producer of the documentary Connections made an uncannily accurate forecast of a future world connected. In only 30 years we have evolved from that relatively “unconnected” age, to where we now live in “The World Connected” that Burke predicted.

Amphenol Corp. (APH), founded in 1932 and headquartered in Wallingford, Connecticut, has been built upon a worldwide vision of connecting people with technology. Amphenol is one of the largest manufactures of interconnect products in the world. They manufacture electrical, electronic and fiber optic connectors, interconnect systems, and coaxial and flat-ribbon cable for a diverse group of vital industries.

Served Markets

1. Military and Commercial Aerospace represent 24% of Amphenol’s sales. Amphenol is the world leader in the production of high performance interconnect systems for military and commercial aerospace harsh environment applications. From Amphenol’s website: “Nowhere is high performance more important than in the extreme condition of outer space. That’s why the International Space Station has relied on Amphenol interconnects since 1998.”
2. Information Technology and Data Communication produces 19% of Amphenol’s sales. Amphenol is a global supplier of interconnect products for internet enabling systems. From Amphenol’s website: “Amphenol knows its way around the corporate datacenter. With expertise in all areas of interconnect solutions for high speed computing and data storage virtually all internet traffic passes through an Amphenol interconnect somewhere along its path.”
3. Mobile Devices generate 16% of Amphenol’s sales. Amphenol manufactures essentially all of the interconnect devices found in mobile phones, PDA’s and other mobile devices. Amphenol states that their components can be found in more than 50% of the world’s mobile phones. From Amphenol’s website: “There is good chance an Amphenol component is helping you make that next phone call. In 2007 more than half of the world’s 1.1 billion produced phones included at least one Amphenol component.”
4. Mobile Networks produce 16% of Amphenol’s sales. Amphenol provides products and solutions to the wireless infrastructure market to include cellular base stations, switches, wireless routers, and antenna systems as well as transceivers, filters, and amplifiers across all standards. From Amphenol’s website: “Amphenol is the only company that can support the entire interconnect requirements of a cellular infrastructure system.”
5. Broadband Communication generates 10% of Amphenol’s sales. Amphenol is a world leader in broadband cable television communication products. They offer coaxial cable, interconnect devices, and fiber optic components, as well as, radio frequency connectors deployed on equipment ranging from digital set-top boxes to cable modems and other devices. Amphenol is a leader in broadband communications. From Amphenol’s website: “In one year, Amphenol Times Fiber Communications produces almost enough cable to reach from the earth to the moon and back.”
6. Industrial Applications produce 9% of Amphenol’s sales. The segment provides interconnect systems for medical equipment, factory automation, heavy equipment, instrumentation, motion control, rail mass transportation and natural resource exploration. From Amphenol’s website: “Lighting the Eiffel tower was no easy task. The job took 3 months, 20 mountain climbers, 800 strings of lights weighing 44,000 lbs. and some seriously high performance connectors.”
7. Automotive Safety devices generate 6% of Amphenol’s sales. Amphenol invented airbag and seatbelt pretensioner interconnect systems. In addition Amphenol provides advanced interconnect solutions for the expanding electronics in automobiles. From Amphenol’s website: “One Amphenol hybrid car connector handles as much electrical power as a small townhouse complex. Bringing this power safely to the road requires complete water tightness, vibration protection and shielding.”

Business Segments

We believe Amphenol is best of breed in the connectors segment of the electronics supply industry. Their two primary business segments are Interconnect Products and Assemblies that account for 91% of revenues and Cable Products make up the remaining 9%. With strong and persistent margins, we believe Amphenol is clearly the best managed company versus their main competitors. Figure 1 depicts Amphenol’s operating excellence via earnings per share growth since calendar year 2000.

Fig. 1. APH 11 year EPS Growth (see short video)

Figure 2 depicts the operating results of Molex (MOLX), a major pure play competitor of Amphenol, over the same period since calendar year 2000.

Fig. 2. MOLX 11 year EPS Growth (see short video)

In the same time frame and economic environment, Amphenol grew earnings per share from $.65 in 2000 to $1.74 estimate for 2009, for a compounded growth of 18.3%. (see figure 1, red circle). While Molex saw earnings per share shrink from $1.13 per share in 2000 to only $.30 per share in 2009. This is a clear testament to how well Amphenol is managed.

Figures 3 & 4 overlay stock prices and calculate comparative shareholder returns for both companies. Take special note how stock prices correlate and track earnings for both companies.

Fig. 3. APH 11 year EPS Growth - Price Perf. Correlation (see short video)

Fig. 4. MOLX 11 year EPS Growth - Price Perf. Correlation (see short video)

Although Amphenol’s debt represents 37% of their capital structure they are a prodigious generator of free cash. Figure 5 depicts that Amphenol generates more free cash flow than earnings per share which speaks to the quality of their earnings.

Fig. 5. APH 11 year EPS and Free Cash Flow (see short video)

Thesis for Growth

Since technology has typically led us out of recessions we believe Amphenol is well prepared to resume and potentially accelerate their historical growth achievements. Amphenol is beginning to experience improvement in end market demand and has been gaining market share in important markets such as mobile devices, military/aerospace and others. Also, acknowledged for aggressively rightsizing their business based on demand they are also known for achieving efficiency without sacrificing capacity. Therefore, Amphenol is well positioned to exploit opportunity as business returns to robust levels.

Amphenol’s strong balance sheet and cash flow generation enables them to fund growth through acquisitions and continued new product rollouts. Amphenol already boasts the broadest products portfolio in the industry and leads in innovative product launches. Amphenol targets high growth acquisitions on a global basis which we believe provides them a strong competitive advantage. With manufacturing and assembly facilities strategically placed in China, Mexico, India, Eastern Europe, Africa and Australia, Amphenol is a low cost supplier of product to the world markets.

Amphenol is an experienced and skilled integrator of strategic high growth acquisitions as evidenced by their recent acquisition of Jaybeam Wireless. Management believes that Jaybeam with operations in the United States, United Kingdom and France enhances Amphenol’s already strong presence in these important markets. More recently, Amphenol completed the acquisition of Times Microwave Systems, a world leader in high performance radio frequency interconnect technology for Amphenol’s biggest markets; Military & Aerospace, and wireless communication. Healthy liquidity and a strong balance sheet have Amphenol ready to continue their strategic acquisition imperatives.

Valuation

After having their stock price unjustly beaten up by the 2008 bear market, Amphenol has rallied strongly off of its lows and is now fairly valued in our opinion. (see figure 3, yellow arrow). At just over 17 times earnings, Amphenol appears attractively priced based on a consensus forward forecast of 15 to 20% future earnings growth. A modest, but growing dividend is also a plus. Therefore, we believe that Amphenol represents a solid choice for the prudent long-term investor seeking capital appreciation and a small but growing dividend income.