Amphenol: Growth Through Acquisitions

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About: Amphenol Corporation (APH)
by: Kurt Pollet
Summary

Amphenol has a long list of acquisitions that provide a diversified revenue stream.

The company has a solid history of revenue and earnings growth with more growth expected for 2020.

Amphenol is a profitable growing company that pays a modest dividend.

Amphenol Corporation (NYSE:APH) has produced solid growth over the years with its numerous acquisitions. Amphenol is an electronics engineering based company that operates in eight market segments to provide a diversified revenue stream. The stock is a little expensive, but has strong growth potential and would make a solid long-term investment.

Financials

Amphenol has produced solid growth over the last decade and more growth is forecast for 2020. The company operates with solid profit margins and returns on equity. Over the last decade the company’s profit margins have averaged around 13% and its return on equity has averaged around 22%.

Amphenol has a history of operating with moderate debt levels. The company's long-term debt is currently $3.7 billion, representing 36% of its total asset value. The company’s total liabilities represents 59% of its total asset value. Amphenol’s current ratio is 2.5, meaning that its short-term assets (such as cash and deposits) easily cover its short-term liabilities (bills the company has to pay). I personally prefer generous current ratios so that the company’s bills can be paid with cash rather than having to constantly dip into its long-term finances.

Amphenol’s 2020 forward PE multiple is 20.4x with a stock price of $87. The company’s trailing PE multiple is 23.2x and its book value multiple is 6.3x. These multiples imply that Amphenol is expensive.

The company pays a dividend with a forward yield of 0.92% and a trailing yield of 1.06%. The dividend payout ratio is 24%.

Amphenol has a solid history of growth, with its revenue increasing at an average rate of 13% per year over the last decade. The chart below visually shows Amphenol’s revenue and earnings trend over the last decade along with the next two years of consensus forecasts.

Amphenol revenue and earnings history chart

Amphenol data by ADVFN

As the above chart shows, Amphenol has a history of revenue growth and the company’s earnings have trended upwards, even though they dipped in 2017 before recovering. The analysts are expecting Amphenol’s revenue and earnings to increase through to 2020.

Business Model

Amphenol has been busy on the acquisition front having acquired 11 businesses since 2016 (which includes three businesses from the same company):

  • 2019 Charles Industries - manufactures electronic devices for wireless, telecom, and broadband service providers
  • 2019 Aurora - provides printed circuit board connectors.
  • 2018 SSI Control Technologies – manufactures sensors. A division acquired from of SSI Technologies, Inc.
  • 2018 Ardent Concepts - provides electronic interface products.
  • 2017 Intelligente Sensorsysteme Dresden GmbH - manufactures interconnect systems for fiber optic cables.
  • 2017 Phitek - manufactures electronic components used in aircraft cabins.
  • 2017 Amphenol acquired three businesses from Meggitt PLC - Wilcoxon Research, Piezo Technologies, and Piher Sensors and Controls. All three businesses manufacture industrial senses.
  • 2016 AUXEL FTG – provides interconnection and power distribution solutions.
  • 2016 FCI Asia - manufactures electronic connectors.

Amphenol’s numerous acquisitions are the company’s main growth driver. Management is quite selective in their selections and only acquires businesses that complement the company’s general product offerings, while at the same time providing a solid return on their investment.

The company’s CEO, Adam Norwitt, stated in their latest earnings call that he was "very pleased in the quarter to have completed two new acquisitions ... which collectively represent $140 million of annualized sales and which we acquired for a total purchase price for approximately $200 million."

The two acquisitions the CEO is referring to are the recently acquired Charles Industries and Aurora. The combined price-to-sales ratio of these two acquisitions is an impressive 1.4x. This indicates to me that management has strong negotiating skills. I think that acquiring profitable businesses on the cheap is a great tactic for boosting the company’s growth.

In fact, since 1999 Amphenol has acquired a whopping 53 businesses up until now. I think that Amphenol’s acquisition strategy works well, as is evident in the company’s growth history with earnings increasing at an average rate of 17% per year over the last decade.

Management commented on the successful integration of their acquisitions, with the CEO stating:

Our ability to identify and execute upon acquisition opportunities and then to successfully bring these new companies into the Amphenol family remains a core competitive advantage for Amphenol.

One of the advantages with acquisitions is that Amphenol effectively acquires new products without incurring any of the development costs. In 2018, Amphenol’s R&D expenses were only $221 million. This represents only 2.7% of the company’s $8.2 billion in revenue for 2018. By acquiring businesses (as opposed to developing the products themselves), Amphenol gains a skilled workforce along with an established market for the acquired businesses product. I think that acquisitions are a cost-effective and time-efficient strategy for bringing new products to the market.

While Amphenol’s acquisitions are all electronics based businesses operating within the electronic connectors and interconnect systems fields, the company’s range of products are used within eight different engineering fields. These fields include:

  1. Military (11% of revenue).
  2. Commercial aerospace (5% of revenue).
  3. Industrial (21% of revenue).
  4. Automotive (19% of revenue).
  5. Mobile devices (12% of revenue).
  6. IT & data communications (20% of revenue).
  7. Mobile networks (8% of revenue).
  8. Broadband (4% of revenue).

The range of engineering fields provides diversification to help smooth out the company’s revenue growth, with the CEO calling it a "very important principle for us that we tried to stay diversified across markets":

We believe this diversification helps to mitigate the impact of the volatility of individual end markets.

I can understand managements view regarding diversification, as it’s not uncommon for some engineering segments to show strong growth while others go through periods of slow growth or even contract. The following shows the growth or contraction in revenue from Amphenol’s eight segments (based on first quarter 2019 revenue growth over the first quarter 2018):

  1. Military (16% growth).
  2. Commercial aerospace (14% growth).
  3. Industrial (10% growth).
  4. Automotive (down 2%).
  5. Mobile devices (down 10%).
  6. IT & data communications (11% growth).
  7. Mobile networks (5% growth).
  8. Broadband (down 7%).

Three out of the eight engineering segments actually booked a drop in revenue, but the company’s total revenue still increased 5% from the first quarter 2019 over the same quarter a year ago. If the company had only products for the broadband and data communications markets, then its revenue would have dropped as both of these segments booked a drop in revenue.

Amphenol is an electronics engineering company that is not normally associated with strong growth. These companies often show slow growth and not the 13% revenue growth and 17% earnings growth that Amphenol has averaged over the last decade.

Stock Valuation

As Amphenol has a history of growth, the PEG (PE divided by the earnings growth rate) can be used to arrive at a valuation based on its earnings growth.

The analysts are expecting the company’s earnings to increase 11% heading into 2020, which gives a forward PEG of around 1.9 with a 2020 PE multiple of 20.4x.

It’s commonly accepted that a stock is fairly valued when its forward PEG is 1.0 which means that Amphenol is overvalued with a stock price of $87. Its fair value would be around $47.

Stock Price

As an active investor I personally like to determine some likely price targets. This gives me a feel for how high the stock price could go in the short term and how soon it could get there.

Amphenol ten year stock chart

Amphenol chart by StockCharts.com

Over the last decade Amphenol’s stock price has trended higher with minor pull backs along the way. The stock pulled back late last year as the stock market pulled back from its all-time high. This year the stock surged higher as the stock market recovered, but has recently pulled back again. The recent pullback corresponds with the latest earnings release, where guidance was lowered slightly for the 2019 fiscal year. Through personal experience, I’ve found this market reaction to be normal behavior and it tends to be short lived without any lasting effects.

The stock showed strong rallies through 2016 and 2017, having gained around 40% per year. In the short term, the stock could continue with the strength of these former rallies. Adding a 40% rally to this year’s $77 low gives a target of $108 which could be reached by the end of the year.

Over the longer term, I think that Amphenol will continue trading higher in line with its earnings growth potential. As the company has a strong history of growth, even if it books a poor earnings result, I think it might just trade sideways as it during 2018 when it booked a poor earnings result for the 2017 fiscal year.

Conclusion

Amphenol has a business model that is based on inorganic growth through acquisitions. Amphenol has acquired 11 businesses since 2016 and acquired 53 businesses since 1999. The company has a successful track record of integrating their acquisitions as is evident from the company’s strong historical growth.

While Amphenol’s acquisitions are all electronics engineering-based businesses, they operate in eight different fields, which provides diversification for Amphenol’s revenue stream.

Amphenol is a profitable company operating with strong margins and pays a modest dividend. The stock is a little expensive with a forward PEG of 1.9 and a forward PE multiple of 20.4x, but the company does have a solid history of growth which is likely to continue. I think the stock would make a solid long-term investment.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.