Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: Flash Update: 1Q18 Earnings
Prev. Ed.: Feb 12, 2018: 4Q17 Earnings Update
FLASH UPDATE [Earnings update in progress; to follow]
Amphenol Corporation delivered 1Q18 adjusted EPS of 83 cents, which increased 20.3% from the year-ago quarter.
Net sales increased 19.7% y/y to $1.87 billion. Favorable currency exchange rate contributed $63 million in the quarter.
Revenues were driven by strong organic growth across most of Amphenol’s end markets, in particular, mobile devices, military, industrial, automotive, and commercial air.
Interconnect Products and Assemblies (94.8% of net sales) revenues surged 20.9% from the year-ago quarter to $1.77 billion. Moreover, Cable Products and Solutions sales were $96.9 million, up 0.3% y/y.
Operating Details
Gross margin contracted 60 basis points (bps) from the year-ago quarter to 32.5%.
Selling, general & administrative (SG&A) as percentage of revenues increased 60 bps from the year-ago quarter to 12.3%.
Operating margin expanded 10 bps on a y/y basis to 20.2%.
Segment wise, Interconnect Products and Assemblies operating margin remained flat at 22.1%. However, Cable Products and Solutions operating margin declined 250 bps to 11.7%.
Balance Sheet and Cash Flow
As of Mar 31, 2018, Amphenol had cash and cash equivalents worth $1.02 billion, lower than $17.2 billion as of Dec 31, 2017.
Cash flow from operations was $130.2 million at the end of the first quarter.
During the quarter, the company repurchased approximately 4.2 million shares and completed its $1 billion two-year open market stock repurchase plan.
Amphenol’s board also approved a 21% increase in dividend payout as well as a new three-year open market stock repurchase plan. The quarterly dividend will increase from 19 cents to 23 cents per share. The new three-year open market stock repurchase plan is authorized for the purchase of up to $2 billion of Amphenol’s common stock.
Guidance
For 2Q18, Amphenol projects sales between $1.855 billion and $1.895 billion. Adjusted EPS are expected between 83 cents and 85 cents.
For FY18, Amphenol now expects sales in the range of $7.630-$7.750 billion (up from previous range of $7.440-$7.600 billion), representing y/y increase of 9-11%. The company expects adjusted EPS in the range of $3.49-$3.55 (up from previous range of $3.39-$3.47), an increase of 12-14% y/y.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON APH
Portfolio Manager Executive Summary [NOTE: Only highlighted material has been changed]
Amphenol Corp. (APH or the company) is a manufacturer of interconnect products. The company designs, manufactures and markets electrical, electronic and fiber optic connectors, coaxial and flat-ribbon cable, and interconnect systems. The company operates in two segments: a) Interconnect Products and Assemblies and b) Cable Products and solutions.
Of the nine firms in the Digest Group covering the stock, four provided neutral ratings while five rated the firm positively. None of the firms assigned a negative rating.
Neutral or equivalent outlook – (4/9 firms or 44.4%) – The firms with a neutral stance believe that the stock price of APH already reflects its structural and cyclical strength. The bulk of the company’s revenues comes from sales to the communications industry, demand for which is subject to rapid technological change. In addition, the North American automotive market is a mature market, which may hamper demand for the company’s product lines. While they are confident of Amphenol’s superior execution and moderate growth prospects, the current valuation feels a bit too rich for these firms. Hence, they prefer to wait for a better entry point at a more conservative valuation.
Buy or equivalent outlook – (5/9 firms or 55.6%) – These firms believe that Amphenol is pursuing an aggressive acquisition strategy to fuel growth. The company is steadily making acquisitions in high-growth markets on a global scale, seeking complementary capabilities from a product, customer and/or geographic standpoint. The firms believe that there may be an increase in M&A activities and share repurchases due to changes arising from the recently enacted tax act. Disciplined capital deployment efforts coupled with strength in fundamental drivers in key end markets can boost the stock. In addition, Amphenol’s advanced product range and diversified business is likely to enhance its performance moving ahead. Also, a balanced organic and inorganic growth model, a lean and flexible cost structure, and an agile and entrepreneurial management team augur well for its long-term growth perspectives. The lower U.S. tax rate may provide a boost to EPS. Also, repatriation tax on cumulative foreign subsidiary earnings is minimal and has tax deferring benefits. This can provide the company with sufficient liquidity, per its requirements.
Feb 12, 2018
Overview [NOTE: Only highlighted material has been changed]
Wallingford, CT-based Amphenol Corp. is a producer of interconnect-related products catering to the mobile communication, wireless, Internet, military, automotive and industrial markets. Amphenol operates in two segments: 1) Interconnect Products and Assemblies, and 2) Cable Products. The company employs advanced manufacturing processes across the globe, and manufactures and assembles products at facilities in North America, South America, Europe, Asia and Australia. Amphenol sells coaxial cable products, primarily to cable television operators and telecommunication companies, and derives its revenue from North America, Europe, Asia and other regions. For more information, please visit www.amphenol.com.
Brokerage firms identified the following key factors for evaluating the investment merits of APH:
Key Positive Arguments / Key Negative Arguments· Strong presence in military, aerospace and automotive communication markets are expected to fuel growth. Demand remains healthy in majority of the end-markets served, including handsets.
· New product launches and diversification into the Chinese and other Asian markets enable the company to exploit new growth opportunities and expand its global footprint.
· The lower U.S. tax rate may provide a boost to EPS. Also, repatriation tax on cumulative foreign subsidiary earnings is minimal and has tax deferring benefits. This can provide the company with sufficient liquidity that can be used to make lucrative strategic acquisitions.
· Amphenol has had a rich history of successfully integrating acquisitions and has recently completed few acquisitions, which are expected to be strongly accretive to earnings going forward. / · Economic slowdown, both globally and in key markets, can have a negative impact on the company’s financial results and cash flow.
· A continued increase in costs of raw material like copper and gold can have an unfavorable impact on Amphenol’s earnings.
· Given its international presence, currency fluctuations could have a negative impact on the company’s earnings.
· APH generates substantial revenues from China, which being an emerging market, has higher country risk.
· Telecom companies have made much lower capital expenditures recently. This can have a negative impact.
· Automobile sales have been substantially low in the U.S. market which raises concern.
· The military and aerospace markets are subject to strict regulations and any policy changes can have significant impact.
Note: The company’s fiscal year coincides with the calendar year.
Feb 12, 2018
Long-Term Growth [NOTE: Only highlighted material has been changed]
The firms believe Amphenol is well positioned to benefit from the improving economy and growing demand for technology over the next few years. The company has outgrown the overall connector industry through share gains and acquisitions. Military/Aerospace business is the key to Amphenol’s profitability over the next few years, as it carries the highest incremental margins.
Amphenol aims to make acquisitions on a global basis in the high-growth segments that have complementary capabilities from a product, customer and/or geographic standpoint. The company has made significant acquisitions in the previous year and expects these to strengthen its global foothold and enhance product offerings in strategic markets.
However, the company is facing weakened demand amid global markets uncertainty and downturn in commodity prices. Also, increasing turbulence in certain economies has cast a dampener on global industrial demand, affecting several of the company’s end markets. The company is also facing moderation in demand in the automotive and IT datacom market.
But in the longer term, the company is well positioned to benefit from the expanding adoption of electronics in military hardware. Amphenol remains well positioned in the mobile networks market as well, with its leading breadth of interconnect and antenna products and aims to participate broadly in the ongoing next-generation mobile network deployments globally. The company expects long-term success in this broadband market, primarily due to its proven capability to create innovative solutions. Regardless of the near-term softening in the IT datacom market, Amphenol continues to make outstanding progress in designing its advanced high-speed and power products for next-generation equipment. Amphenol remains confident with its leading technology and preferred supplier relationships with a broad range of device makers in the mobile devices market.
Feb 12, 2018
Target Price/Valuation [NOTE: Only highlighted material has been changed]
Provided below is a summary of valuations and ratings as compiled by Zacks Research Digest:
Rating DistributionPositive / 55.6% ↔
Neutral / 44.4%↔
Negative / 0.0% ↔
Average Target Price / $95.13↑
Digest High / $105.00 ↑
Digest Low / $85.00 ↑
Firms with Target Price/Total No. / 8/9 ↔
Reduced demand for high-end information technology or electric components and services, higher raw material costs (copper, gold, plastics and aluminum), integration risks, general macroeconomic risks and new competitors in low-cost geographies are challenges to achieving the target price.
b 12, 2018
Recent Events [NOTE: Only highlighted material has been changed]
On Feb 2, 2018, Amphenol declared regular dividend of 19 cents per share for 1Q18 to be paid to its common shareholders.
On Jan 24, 2018, Amphenol reported 4Q17 results with healthy year-over-year increase in both earnings and revenues. Quarterly adjusted earnings came in at 86 cents per share, higher than the year-ago tally of 75 cents. The figure beat the Zacks Consensus Estimate of 81 cents. Revenues came in at $1,943.9 million compared with $1,651.1 million in the year-ago quarter. The top line comfortably surpassed the Zacks Consensus Estimate of $1,791 million.
Revenues [NOTE: Only highlighted material has been changed]
4Q17 revenues came in at $1,943.9 million, a substantial rise from $1,651.1 million in the prior-year quarter. The company noted that this upside stemmed from stronger information technology, military, automotive, data communications and industrial markets’ demand. The company has successfully made several acquisitions which have contributed to the upside growth. The top line surpassed the Zacks Consensus Estimate of $1,791 million.
Segment Revenues as compiled by the company are given below:
Interconnect Products: Amphenol produces a broad range of interconnect products and assemblies primarily for voice, video and data communication systems, commercial aerospace and military systems, automotive and mass transportation applications, and industrial and factory automation equipment.
Revenues of Interconnect Products and Assemblies segment came in at $1,852.6 million, up 19.1% year over year.
Cable Products: The Cable Products segment includes semi-flexible and flexible coaxial cables, primarily used in the cable television industry.
Sales of Cable Products and Solutions segment were $91.3 million, down 4.7% year over year.
Outlook
Amphenol expects 1Q18 revenues in the range of $1.78-$1.82 billion. For FY18, the company expects sales in the range of $7.4-$7.6 billion, representing a year-over-year increase of 6-8%.
Margins [NOTE: Only highlighted material has been changed]
Cost of sales in the reported quarter came in at $1,308.5 million, up 18.4% year over year. Selling, general and administrative expenses jumped 14% year over year to $236 million. Interest expenses during the quarter were $25 million compared with $18.4 million reported in the year-earlier quarter.
Gross profit margin was 32.7%, down 40 basis points (bps) year over year. Operating margin in the quarter remained constant at 20.5%.
Earnings per Share (EPS) [NOTE: Only highlighted material has been changed]
Quarterly adjusted earnings came in at 86 cents per share, higher than the year-ago tally of 75 cents. The figure beat the Zacks Consensus Estimate of 81 cents.
Outlook
1Q18 adjusted earnings are expected to be in the range of 78-80 cents per share. For FY18, the company expects adjusted earnings per share in the range of $3.39-$3.47, an increase of 9-11% year over year.
Feb 12, 2018
Research Analyst / Madhura BhattacharyyaCopy Editor
Content Ed.
QCA
Lead Analyst
Reason for Update / 1Q18 Flash Update
Zacks Investment Research Page 6 www.zackspro.com