2023-05-04 04:39:45 ET
Summary
- Amphenol beat earnings on top and bottom but issued weaker guidance in Q2 2023.
- The company has slightly outperformed the S&P 500, demonstrating its ability to efficiently allocate capital.
- The company's consistent strategic acquisitions will create a more resilient company in the future with diversified revenue streams.
- Assuming my DCF assumptions, Amphenol is currently overvalued resulting in a hold rating.
Amphenol ( APH ) has demonstrated steady growth in both its share price and dividend payouts over the years. The company's growth has been fueled by strategic acquisitions that have diversified its business operations and driven expansion. However, given the overvaluation based on my DCF analysis, I would rate this stock as a hold. While the company has significant long-term growth potential, its current price is relatively expensive.
Business Overview
Amphenol Corporation and its subsidiaries are primarily involved in the design, manufacturing, and marketing of electrical, electronic, and fiber optic connectors across the globe, with operations in the United States, China, and other international locations. The company has a workforce of over 91,000 employees and is organized into three main segments: Harsh Environment Solutions, Communications Solutions, and Interconnect and Sensor Systems. Amphenol Corporation offers a diverse range of products including connectors and connector systems, value-add products, as well as specialty items like sensors and cables.
Amphenol Corporation is currently priced at $75.36, which is near its 200-day moving average and takes into account the company's strong market capitalization of $45.506 billion and ROIC of 16%. The stock has a 52-week high of $82.86 and a low of $61.67, with a P/E ratio of 24.71 which reflects the company's strong competitive position and ROIC.
In addition to its solid financials, Amphenol pays a healthy dividend of 1.1% and has a safe payout ratio of 26.52%, which leaves ample room for the company to execute its CapEx plans to differentiate and expand its business. This is further supported by the company's ability to generate free cash flow, which is key to its strategy of pursuing both organic and inorganic growth through R&D and acquisitions.
Amphenol Corporation delivered better-than-expected Q1 2023 results , with a 2.31% beat on revenue at $2.97 billion, and a 2.92% beat on earnings per share with $0.69 compared to expectations of $0.67. This strong performance is particularly impressive in a time of moderate economic challenges.
However, for Q2 2023, Amphenol anticipates a decline in sales of 6% to 8%, ranging from $2.890 billion to $2.950 billion, compared to the previous year's quarter. Additionally, adjusted diluted EPS is expected to decrease by 9% to 12% to a range of $0.66 to $0.68. This decline in guidance highlights the importance of Amphenol's efforts to diversify its revenue streams through acquisitions to increase its resilience in the future.
By pursuing strategic acquisitions, the company aims to further integrate its product lines and strengthen its business portfolio, allowing for greater diversification of its revenue streams. This strategy is critical to mitigate the potential impact of any future economic headwinds and position the company for sustained success.
Outperforming the Broader Market
Over the last 10 years, Amphenol has been able to successfully outperform the S&P 500 which displays the company's effectiveness at deploying capital and generating cash flows to create compounding growth for investors in the long run.
Strategic Acquisitions Creating Avenues for Growth
Amphenol has a track record of effectively integrating acquisitions and innovations into its core business model, driving its FCF forward and improving profit margins. This has enabled the company to invest in new opportunities and leverage technological advancements.
One acquisition that particularly stands out is the purchase of MTS Systems in April 2021 for $750 million. MTS is a leading global supplier of advanced test systems, motion simulators, and precision sensors, generating annual revenues of $350 million. This amount of revenue displays how Amphenol can utilize its size to boost the business' performance and have a quick cash flow regeneration that can be reinvested into R&D or future acquisitions.
The acquisition is a strategic move as it allows MTS to complement Amphenol's existing aerospace and automotive industries, strengthening these core segments. Additionally, it diversifies Amphenol's revenues, providing a hedge against segment headwinds and expanding the company's portfolio of expertise. The appropriate allocation of funds will enable Amphenol to expand certain segments and support others when necessary.
Analyst Consensus
Analyst consensus rates Amphenol as a "buy". The stock, although slightly overvalued, still holds great potential returns exemplified by the average price target at $86.31 presenting a 14.53% upside.
Valuation
To begin my analysis, I calculated the Cost of Equity and WACC for Amphenol using the Capital Asset Pricing Model. After factoring in a risk-free rate of 3.43%, I determined that the Cost of Equity for the company was 7.96%, as demonstrated below.
Assuming this Cost of Equity value, I was able to calculate the WACC to be 7.32% as shown below, which is under the industry average of 11.68%.
After conducting a Firm Model DCF analysis using FCFF without CapEX, I have concluded that Amphenol is currently overvalued by 20% based on a fair value of approximately $59.95. This determination was reached using a discount rate of 7.32% for a 5-year period.
To arrive at this conclusion, I assumed a high-single-digit revenue growth rate beyond 2023, with growth decelerating to mid-single digits in subsequent years as the company expands and faces more significant growth obstacles. Additionally, I factored in the company's continued efforts to enhance its innovations and acquire more efficient assets, leading to an expansion of their margins over time, as highlighted in my DCF analysis.
Risks
Cybersecurity Concerns: Cybersecurity incidents can impact Amphenol's information technology systems and may cause considerable disruptions to their business operations. Such incidents could potentially lead to the disclosure of highly confidential information, which may negatively impact the company's reputation and operational results. Furthermore, these incidents may result in legal action and/or investigations by government agencies, which could lead to fines.
Potential Macroeconomic Headwinds: Amphenol is vulnerable to revenue declines and FCF strains if a recession occurs within the next 12 months, potentially impeding the company's ability to make acquisitions and jeopardizing its stable financial position.
Conclusion
In summary, Amphenol is a sound company that pays out a secure dividend and efficiently reinvests FCF into R&D and acquisitions, which is evident from its high ROIC. However, based on my DCF valuation and its current high valuation, I would rate this company as a hold. Although there is significant long-term growth potential, it is currently relatively expensive.
For further details see:
Amphenol: Consistent Growth Driven By Strategic Acquisitions And Synergies