Amphenol: Shares Have Enjoyed A Re-Rating Again In 2023

In the summer of 2022, I believed that Amphenol (NYSE:APH) was a value compounder at work. The company has seen signs of life again as the company pursued bolt-on deals again in the aftermath of the pandemic.

The company has continued to pursue bolt-on dealmaking at various occasions, yet 2023 has been somewhat of a lost year with stagnant sales and earnings (so far). As shares have moved higher again in 2023, the premium valuation has returned, leaving me a bit cautious, even as leverage has come down a great deal.

Enable Electronics Anywhere

The header of this paragraph is the mission of Amphenol, being a provider of interconnect, antenna and sensor solutions. The company is a global business in terms of exposure to different geographic regions, as well as diversification across end markets, with products used in industrial, automotive, IT datacom, mobile networks, mobile devices, military and aerospace applications, among others.

In business for nearly a century, Amphenol has steadily grown to an $8 billion sales base, which posted margins around 20%. The positioning to historical megatrends, and future megatrends such as clean and efficient energy, greater connectivity, mobility and 5G, has served long-term investors extremely well.

On top of the solid positioning, the company has relied on a steady stream of bolt-on dealmaking to further grow the business. Pre-pandemic, that is 2019, the company posted sales of $8.2 billion on which it reported substantial earnings of $1.2 billion, for earnings of $3.75 per share (that is ahead of a two-for-one stock split which followed in 2021). With shares trading around the $100 mark early in 2020, valuations were demanding at a multiple in the mid-twenties.

To further ignite growth during the pandemic, the company acquired MTS Systems in a $1.7 billion deal in 2020, as Amphenol furthermore acquired Halo Technology in a $715 million deal in 2021, besides some smaller bolt-on deals being announced.

These deals and the recovery post Covid-19 made that 2021 sales rose by 26% to $10.9 billion, as earnings came in at $2.50 per share (post the stock split of course). The company furthermore posted stronger earnings in the fourth quarter, all while net debt was rather limited.

Shares rose to the $77 mark in the summer of 2022, a year in which earnings were seen around $3 per share, all while leverage was rather modest at about 1.5 times EBITDA as the company continued to pursue bolt-on acquisitions. Recognizing the quality, I found a 25 times multiple a bit too high, yet recognizing the quality of the business, I was compelled to start buying any dip to the $70 mark, which I ended up doing in the fall.

Shares actually ended up falling to lows around $65 late in 2022, before recovering to a high of $90 in recent weeks, with shares now trading at $85 per share.

2023 Revised

Forwarding to February of this year, Amphenol posted its 2022 results. Revenues rose some 16% to $12.6 billion, with adjusted earnings per share up 21% to $3.00 per share. The company furthermore announced two bolt-on deals with the purchase of CMR and part of RFS, adding a combined $175 million in annual sales, equal to nearly 1.5% of annual sales.

With organic growth getting tougher to come by, the company did not provide a 2023 outlook, as it guided for first quarter sales and earnings to fall a bit. Fortunately, net debt has come down to $3.1 billion, which is largely equal to the reported EBITDA in 2023.

In the end of first quarter, sales rose by a percent to $3.0 billion as adjusted earnings per share rose by two pennies to $0.69 per share. In July, the company posted second quarter sales up 3% to $3.1 billion, with adjusted earnings down three pennies to $0.72 per share. Net debt ticked down further to $2.8 billion, resulting in substantial financial room to pursue more deals, needed to rejuvenate some growth.

And Now?

With 2023 being a bit of a lost year in which sales and earnings are seen flattish, the issue is that shares have seen decent gains so far this year, with shares trading at 28 times anticipated earnings this year. That said, leverage has come down a great deal, providing huge opportunities for more dealmaking, but truth be told is that the valuation is quite demanding.

Sitting on 20% gains on a position which I initiated at $70, I am tempted to take profits now. A 20% returns in the time frame of less than a year is decent enough, certainly as 2023 is set to be somewhat of a lost year here, as quality is awarded a premium valuation again here.

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