Amphenol: A Story of Compounding

Summary Perspectives

Amphenol is a world-class Company supported by an industry-leading asset portfolio and proven management team
Long track record of generating above-market and above-peer shareholder value
Effective capital allocation strategy resulting in sustained shareholder value creation
Consistently overperforming operationally and demonstrating best-in-class execution through down cycles
Diversified end-markets underpinned by mega trends
We believe Amphenol will continue to deliver above-market returns

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The Business

Amphenol is a global provider of high-technology interconnect, antenna and sensor solutions serving the industrial, automotive, mobile devices, IT datacom, mobile networks, broadband, military and commercial aerospace sectors. The Company was founded in 1932 and began trading on the New York Stock Exchange in 1991.

Amphenol operates under two reporting segments: 1. Interconnect Products and Assemblies (96% of 2021 net sales) and 2. Cable Products and Solutions (4% of 2021 net sales). The Interconnect Products and Assemblies segment offers a broad range of connectors, antennas and sensors used in a broad range of applications in a diverse set of end markets. Interconnect products attach to electricals, electronics, or other devices to facilitate transmission of power signals. The Cable Products and Solutions segment offers cables and components in the broadband communications and IT sectors.

Company generated $10.9 billion sales, 20% adjusted operating margin, $2.48 Adj. EPS and $1.2 billion free cash flow in 2021. Over its 10-year history, Amphenol demonstrated industry-leading growth and high-quality of earnings with sales CAGR of 11% and EPS CAGR of 13%.

Amphenol’s ability to generate consistent, above-market growth is mainly attributed to its disciplined acquisition strategy. Over the last 10 years, Amphenol acquired approximately 50 companies. Management acquires synergistic businesses that are differentiated by unique IP and are complementary to its core product offerings, all the while generating solid returns for its shareholders based on the dollars invested. Over the years, Amphenol has been able to maintain its competitive advantages as a market leading provider of engineered interconnect solutions through market diversification, enhancement of high-technology performance-enhancing solutions, a broad selection of products and a high level of service worldwide.

During the past 10 years, Amphenol has delivered more value to shareholders than its peers and the broader market.

Industry Dynamics and Growth Catalysts

Amphenol estimates the worldwide sales of interconnect and sensor-related products were approximately $215 billion in 2021. Amphenol’s key competitors are TE Connectivity, Molex and Aptiv. Others include Belden, Carlisle, Commscope, Eaton, Foxconn, Hirose, HUBER+SUHNER, 3M, and among others.

Amphenol is poised to ride major secular trends impacting all of its end-markets, driven by increasing demand for consumer electronic devices, rapid trending of automation technology across sectors that Amphenol participates in. In addition, electrification and autonomous driving in the automotive industry will inevitably increase connector and sensor content per car, further fueling the growth of Amphenol’s products.

In addition to the attractive market growth, we expect Amphenol will continue to consolidate the industry and roll-up assets that are strategically complementary to their core product technologies. As a result, we expect to see Amphenol continuing to deliver above-market growth in the future.

Valuation

Amphenol’s strong track record of capital allocation and consistent operational execution have resulted in a sustained premium valuation relative to peers and the broader market through-the-cycle. With each setback in the market during 2015 / 2016 oil crisis and the more recent COVID outbreak, Amphenol has demonstrated again and again its operational resiliency and opportunistic expansion through M&A. We believe Amphenol will continue to trade at a premium multiple driven by its best-in-class asset portfolio and a result-oriented management team that will continue to execute both organic and inorganic growth plans.

Risks

Amphenol’s continued ability to deliver above-market growth predicated on successful execution of both organic and inorganic measures. As the consolidator of choice in a fragmented connector industry, management’s ability to generate attractive returns from capital invested are contingent on the availability of under-valued synergistic quality assets, the discipline of not overpaying for these assets, and the continued execution of post-acquisition integrations. Additionally, just like all other companies, Amphenol is susceptible to macro challenges during times of high inflation, geopolitical uncertainties, supply chain disruptions, among many others. Management’s ability to navigate through these challenges will be key to its continued outperformance.

Closing Thoughts

We believe Amphenol has best-in-class management and processes in place to consistently create long-term shareholder value. We like this stock and believe in the long-term potential as the Company continues to expand its competitive advantages in a disciplined manner.

Disclosure: This article solely represents Her Investing’s opinions. Her Investing is not receiving compensation for it, nor has any business relationships with any company whose stock is mentioned in this article.