Amphenol: Strong Fundamentals, But Wait For A Pullback (NYSE:APH)

Amphenol Corporation (NYSE:APH) has been exceeding expectations in recent quarters, with its last quarter breaking company records in several metrics. Although concerns remain on what level of spending cuts its customer base many engage in heading into 2023, so far management said that, for the most part it has remained strong, outside of a few outliers.

That of course could change quickly if the economy gets worse in 2023, but with the current visibility the company has, it looks like it should continue to produce a solid performance on a consistent basis.

In those areas where there have been signs of weakness, management has primarily looked at internal cost-cutting measures where it could in order to support margins, and where it couldn’t do so, it increased prices for the same purpose.

Even though the share price of the company has been volatile over the last couple of years, I think it’s more because of uncertainty surrounding inflation, higher interest rates, supply chain constraints and uncertainty concerning the strength of the economy, rather than the actual performance of APH.

In this article, we’ll look at the performance of the company in the last quarter, some of its larger segments, potential risks in 2023 and what the prospects are.

Latest earnings numbers

Revenue in the third quarter reached a record $3.295 million, up 17 percent from the $889.9 million in revenue generated in the third quarter of 2021. Revenue for the first nine months of 2022 was $9.383 billion, up $1.5 billion from the $7.849 billion in revenue generated in the first nine months of 2021. All three of the largest segments of the company enjoyed double-digit revenue growth in the quarter.

Net income in the third quarter was $496.6 million, or $0.83 per share compared to net income of $426.5 million or $0.70 per share.

Adjusted diluted EPS in the third quarter was a record $0.80, up 23 percent year-over-year. Adjusted operating margin in the reporting period was 21 percent.

GAAP operating margin in the third quarter was up 40 basis points year-over-year, and excluding $12 million in costs associated with an acquisition, it was up 70 basis points year-over-year and 30 basis points sequentially.

Free cash flow in the third quarter came in at a record $457 million.

Performance by segment

In this portion of the article, I want to focus on the three largest segments of APH based upon the revenue generated in the third quarter of 2022. The purpose is to give an idea of the impact they had on the performance of the company and how that could translate into 2023.

Industrial

Industrial represented 25 percent of overall sales in the third quarter, up 13 percent organically from the third quarter of 2021 and up 2 percent sequentially.

There was not any one particular industrial category that drove the growth, as almost all of them contributed to the numbers, according to management.

As for the fourth quarter of 2022, expectations are there will be a modest decline in sales from the third quarter. For full year in the Industrial segment, revenue is expected to be up in the mid-teens from the previous year.

Further out, the addition of ICA should further enhance the performance of APH in the industrial sector in the years ahead. Management believes it is positioned well in the segment to take advantage of the high-tech trends in industrials.

Information Technology and Data Communications

Its Information Technology and Data Communications represented 22 percent of revenue in the third quarter, up 11 percent organically. Most of that came from higher demand in servers and networking applications. A weakness in the segment was products associated with storage.

One concern here is the drop in revenue from the prior quarter by 3 percent. While it was better than expected, it looks like it reflects inventory corrections from its IT datacom customers.

In the fourth quarter, the company is looking for a low double-digit drop in revenue in comparison to the third quarter, based upon slowing demand and the resultant adjustment of inventory levels.

But on a full-year 2022 basis, sales growth is projected to be in the high teens compared to full-year 2021. Even though this may be a temporary headwind for the company, further out this should be a long-term growth segment for APH.

Automotive

The Automotive segment of APH accounted for 20 percent of revenue in the third quarter, up 37 percent organically from the third quarter of 2021. Sales were up 4 percent sequentially, exceeding company expectations.

Sales were up across almost all automotive applications, with a strong contribution from EV-related applications.

Fourth quarter sales in Automotive is guided to be about the same as they were in the third quarter. Full-year sales in the segment are expected to climb by 20 percent compared to full-year 2021. Taken together, these three segments accounted for 67 percent of total revenue in the third quarter. Based upon management guidance, it appears they aren’t going to generate as many sales in the fourth quarter as it did in the third, yet in recent quarters APH has exceeded guidance, so we’ll have to wait and see.

But based upon what I’ve seen with other companies, supply chain constraints, lower demand, inventory adjustments and lack of clarity on economic conditions for 2023 have started to put downward pressure on their performances, as businesses are taking a more defensive posture until there is more visibility.

Conclusion

APH started off the year at a two-year high of approximately $88 per share before collapsing to its 52-week low of $61.67 on June 13, 2022, where it had a double-bottom before rebounding to almost $80.00 per share on August 15, 2022, before pulling back to a double bottom of a little under $67 per share. After that it once again tested the $80.00 per share mark but failed to hold. It’s trading at $75.81 as I write.

So since mid-July 2022 it has traded in a range from about $66.00 per share to approximately $80.00 per share. Based upon the company’s guidance, I don’t see it moving out of that range in the near term.

I think what’s the most likely scenario to play out is investors are going to wait to see the length of time it’ll take to manage inventory before company’s ramp up spending again. While I don’t see it having a big impact on APH, I think it’ll be enough to keep its performance somewhat rangebound.

At the same time, it came off a number of record totals in the third quarter, so when the fourth quarter numbers come out, which are expected to be more moderate, it would put downward pressure on its share price if the company’s performance were in alignment with management expectations.

With that in mind, the next quarter or two could be weaker for APH, and if the economy does go further south and its customers cut further back on spend, it could result in the share price dropping much further, which would be a great time to consider taking a position in the company because, over time I see it as having some solid tailwinds at its back, and as it has proven recently, it has been able to continue to perform very well under less than optimal conditions.