Amphenol Stock: Compounding At Work (NYSE:APH)

Shares of Amphenol (NYSE:APH) have come to life in recent sessions as the business has continued to grow along and pursue bolt-on dealmaking. This is sufficient of a reason to update a thesis which goes back to the final days of 2020.

At the time, I believed that Amphenol has a great long-term performance, even as operational performance has been lagging a bit, and with the company pursuing an interesting bolt-on acquisition, I thought the valuation was a bit too demanding to get involved.

Back To 2020

Amphenol aims to enable electronics anywhere as a provider of interconnect, antenna and sensor solutions. The company is a truly global business in terms of geographic coverage, with diversification seen across end markets, including industrial, automotive, mobile devices, IT datacom, mobile networks, broadband, the military and commercial aerospace applications.

Founded in Chicago during the great depression, the company has steadily grown to $8.2 billion in sales, with solid operating margins seen around a very decent 20%. These solid growth achievements have made that investors have seen huge returns, with shares up a factor of around 250 times over the past three decades, as the future of the end markets still looks good backed up by megatrends like clean and efficient energy, needed for greater connectivity, mobility and 5G, among others.

Besides riding the wave of organic growth in the end markets, Amphenol continues to pursue bolt-on dealmaking with over 50 companies being acquired over the past decade, often comprised out of bolt-on deals.

The issue with Amphenol is that this quality did not come cheap. On the $8.2 billion revenue base in 2019, the company posted net earnings of nearly $1.2 billion, translating into earnings of $3.75 per share. Net debt of $2.7 billion compared to a near $2 billion EBITDA number, as leverage consequently is far from an issue.

The issue is that the company guided for flattish results for 2020, and that was ahead of the pandemic, yet shares traded at $100 at the start of 2020. Looking at the chart, you should see levels around $50 early in 2020, as the company has undergone a two-for-one stock split ever since. The 26 times multiple and prospect for modest growth made me cautious. With earnings performance flattish in 2020, valuations become quite demanding as shares rose to $130 by year-end 2020, again ahead of the split, working down to a 35 times earnings multiple.

At that valuation, Amphenol was valued at $42 billion, as the company spent $1.7 billion to acquire MTS Systems late in 2020, valued at 4% of its enterprise valuation, adding test system, motion simulators and precision sensors to the lineup. The deal looked to be a nice bolt-on, and while the built-up in net debt to $4.0 billion was very manageable, the overall valuation was too high for me to get involved.

Steady As She Goes

Since trading at a split-adjusted price of $65 late in 2020, shares rose in a steady fashion to the high eighties late in 2021, only to sell off to $65 in recent weeks, now trading hands at $77 again, marking modest gains from the end of 2020. After a solid end towards 2020, the company kept improving during 2021, and in December 2021, Amphenol announced the purchase of Halo Technology in a $715 million deal. The Californian company provides active and passive fiber optics interconnect components, with an anticipated $250 million sales contribution. Acquired at less than 3 times sales, the multiple looks pretty reasonable, albeit that no margin details were announced.

In January of this year, the company posted very strong 2021 results with full year revenues up 26% to $10.9 billion in 2021, largely driven by 18% organic growth. Full year earnings came in around $2.50 per share, essentially $5 per share on a pre-split basis, as the results in the final quarter of the year were far stronger already on an annualized basis. Net debt of around $3.6 billion works down to roughly 1.5 times EBITDA of around $2.4 billion.

In April, the company posted a 24% increase in first quarter sales on the back of 17% organic sales growth, as adjusted earnings were fifteen cents ahead of last year at $0.68 per share. The company saw the macro environment deteriorating in the second quarter and guided for 9-11% revenue growth to $2.89-$2.95 billion, with adjusted earnings seen up by similar percentages to $0.66-$0.68 per share.

In July, the company too managed to take away a lot of the concerns, certainly as jittery rose amidst the recent deals and continuing strength of the dollar. Despite this headwind, the second quarter sales of $3.14 billion came in way ahead of the guidance, with earnings posted at $0.75 per share. Moreover, the company guided for solid third quarter sales between $3.04 billion and $3.10 billion, with earnings seen at a midpoint of $0.74 per share.

Alongside the quarterly results, the company announced the bolt-on purchase of NPI, a manufacturer of cable assemblies for industrial (notably semiconductor) industries. The deal adds $65 million in sales, just about 0.5% to pro forma sales with no details announced.

Back To Where We Came From

With Amphenol trading at 25-26 times earnings late in 2020, we see the shares trade at the same multiple again, after the company has seen very strong performance as of late. This comes as operating performance was not so impressive in 2019/2020. While improved momentum and performance are welcomed, the valuations are quite demanding given the move higher interest rates and uncertain environment, although Amphenol has seen a very strong second quarter performance, which truly is impressive, and deserves some recognition.

This great performance makes that net debt of $3.5 billion is actually relatively modest in relation to $2.8 billion in adjusted EBITDA, with leverage being a bit lower than historically the case, giving the company plenty of firepower to pursue more deals.

The recent performance confirms to me that Amphenol truly is world quality, as the bargain probably was seen in recent week in the low sixties. Hence, I am reiterating my liking of the company, yet my neutral stance is at $77, although any pullback to the $70 mark will be used to gobble up a few shares here.