2023-12-19 13:42:04 ET
Summary
- Amphenol Corporation has experienced solid upward growth over the past five years, outperforming the industry.
- The company's strong financial performance and consistent dividend growth make it an attractive investment.
- The recent acquisition of PCTEL is expected to create synergies in market expansion, product innovation, and financial performance.
- I recommend holding this stock for its dividend.
Investment Thesis
Amphenol Corporation ( APH ) has been on a solid upward trajectory over the last five years, gaining over 141% and outperforming the industry with a margin of about 57%.
I attribute this solid performance to the company’s strong financial performance driven by robust demand across its end markets , such as broadband communications, commercial air, automotive, and military. With the information technology industry expected to grow at a growth rate of 8.4% between 2022 and 2032, I expect this company to maintain or even improve its financial performance in the future. Besides its strong financial performance, APH has been consistently growing its dividend over time, making it a decent dividend stock, in my opinion.
To sustain its financial performance and growth, APH has completed the acquisition of PCTEL, Inc.(PCTI), which I expect will yield several synergies ranging from market expansion, product innovation, and financial performance.
While the above attributes make APH very attractive for investors, I believe potential investors could be late to invest here because the stock is already trading at a premium based on relative valuation metrics. For this reason, I recommend current investors hold on to the stock to benefit from its decent dividend payment and enjoy the potential growth arising from the recent acquisition and the projected market growth.
PCTEL Acquisition
PCTEL, Inc., on December 15 th, announced that it had been acquired by Amphenol Corporation. PCTI is a leading provider of wireless technology solutions, including antenna systems, test and measurement products, and industrial IoT devices. Following this acquisition, I expect it to create several synergies that will benefit both companies and their customers, such as:
Market expansion: The acquisition will enable Amphenol to expand its presence and offerings in the wireless infrastructure, industrial IoT, and public safety markets, where PCTEL has a strong reputation and customer base . PCTEL will also benefit from Amphenol’s global scale, distribution network, and access to new markets and customers. I expect the market expansion to translate to a larger customer base as well as improved revenue generation. Additionally, APH will have the ability to penetrate some of the most growing market segments in the IT sector, such as the IoT , which I believe could grant the company a competitive edge and much-needed diversity in the industry. Satellite IoT connections are expected to increase by 25% between 2022 and 2027, from six million to 22 million, a growth that APH can leverage with this acquisition.
Product Innovation : The acquisition, in my view, will enhance Amphenol’s capabilities and portfolio in the antenna solutions area, where PCTEL has been a clear innovation leader . PCTEL’s products are complementary to Amphenol’s existing products and will provide more advanced, reliable, and customized solutions to meet the evolving needs and demands of the customers. A good example of a PCTEL’s product that complements Amphenol’s product is the Edge sensor . This wireless sensor can be embedded into machines and industrial IoT devices to provide real-time data and control. I believe it can be integrated with Amphenol’s connectors and cable assemblies to enable reliable and secure data transmission, resulting in a very innovative product.
Financial performance : The acquisition will be accretive to Amphenol’s earnings in 2024. It will also create operational efficiencies and cost savings as companies integrate their resources and optimize their processes. It will also provide revenue and margin growth opportunities, as the companies will cross-sell their products and services and capture new market opportunities.
In conclusion, this acquisition is a strategic move that will create value for both companies and their customers by combining their strengths and synergies in the interconnect, sensor, and antenna solutions areas. I expect the deal to yield financial efficiencies, higher revenues and margins, and an increased customer base and market share, attributes that I expect to keep this company’s growth solid in the long run.
Financials: Solid Performance And Footing
One of the important aspects that investors should consider before making an investment decision is a company’s financial health. It’s logical that companies with strong financial performance and balance sheets are likely to exhibit a solid share performance as well. With this background, I find it imperative to evaluate the financial status of APH.
APH has registered a very strong financial performance over the last five years, growing its revenues, operating profits, and net income from $8.2 billion, $1.6 billion, and $1.2 billion, respectively, in 2018 to $12.6 billion, $2.6 billion and $1.9 billion respectively in 2022. This represents a 53.6%, 62.5%, and 58.3% growth in revenue, operating profit, and net income over the last five years. As mentioned earlier in this article, this growth has been made possible by the strong demand in the company’s end markets.
Market Screener
In 2023, the company appears to be sustaining its strong financial performance, which I believe explains its share price growth of 29% YTD.
Further, the company has been recording decent Operating and Free Cash Flow, with its operating cash flow growing from $1.54 billion in 2021 to $2.39 billion TTM and its free cash flow growing from $0.8 billion in 2021 to $1.58 billion TTM. In my view, these improving cash flows reflect how well this company can generate from its operations as well as its ability to meet its financial obligations.
Moving to the balance sheet, this company has a total shareholder equity of $7.95 billion and a total debt of $4.29 billion. Its debt-to-equity ratio is 53.9%, which indicates a moderate level of leverage. The company has a strong liquidity position with cash equivalents and short term investments of $1.73 billion and a current ratio of 2.33 x. The company has an interest coverage of about 18%, which means it can easily pay its interest expenses from its earnings. Further, its operating cash flows can cover its total debt by about 55.7%, further signifying the company’s low debt risk. Based on this analysis, I can confidently assert this company has a very strong financial performance and a stable balance sheet, which makes it a haven for current investors.
Dividend
Besides its impressive share price growth, APH has also been paying dividends consistently to its shareholders. In terms of consistency, the company outshines the sector, having paid dividends for 18 consecutive years compared to the industry median of 10 years and having grown its dividend for 12 consecutive years compared to the industry median of 2 years. In my opinion, this makes APH a reputable and reliable income generator for dividend-oriented investors.
In terms of sustainability, its dividends are very sustainable, given that it distributes 26% of its earnings to shareholders. This further shows the possibility of future dividend growth because a higher percentage is maintained to reinvestment, which could result in higher earnings in the future, hence higher dividends.
WallStreet
Given the company’s recent acquisition and the projected growth in the IT sector, which I believe will drive revenues and earnings up, I expect the company to maintain its history of dividend growth in the long run. I am confident that APH will sustain its dividend history, making it a good dividend choice for dividend-oriented investors.
Valuation
According to Seeking Alpha, APH appears to be trading at a premium based on relative valuation metrics, with all of its relative valuation metrics trading above the industry median.
Seeking Alpha
With a trailing P/E ratio of 31.95, it means that investors are paying $31.95 for every $1 of earnings that APH generated in the past year (trailing P/E). This is higher than the average P/E ratio of the S&P 500 index, which is 27.70. This implies that APH is overvalued in relation to its earnings.
Further, with a trailing P/S ratio of 4.73, this means that investors are paying $4.73 for every $1 of revenue that APH generated in the past year. This is higher than the S&P 500 index, which is 2.92. This suggests that APH is overvalued relative to its revenue. With this phenomenon in all valuation metrics, it is apparent that APH is overvalued and, therefore, not a good investment for new investors. However, for current investors, I recommend holding the stock to enjoy the potential growth from the recent acquisition as well as benefit from its attractive dividend policy.
Conclusion
While I am attracted to APH’s strong financial performance and strong balance sheet, which I expect to get better with its recent acquisition, I believe the stock is overvalued based on relative valuation metrics, making it not a good investment opportunity for potential investors at the moment. However, the stock has potential for future growth in its financial fronts courtesy of the projected market growth and its recent acquisition, something I expect to keep its dividend growing. Based on this background, I recommend current investors hold the stock and capitalize on its dividend.
For further details see:
Amphenol Corporation: Hold It For Its Dividend