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Robert Abbott
Robert Abbott
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Amphenol: Why Gurus Have Been Net Buyers

This cable and sensor company will likely resume its growth story in the future

May 27, 2020 | About:

According to GuruFocus data, one of the stocks that has been popular among investing gurus this spring is Amphenol Corporation (NYSE:APH), a company that makes some of the cables that snake over, around and through our computers and their peripherals.

One reason behind its popular right now is likely because it is selling at a discount to its peak bull market price. However, there’s more to this stock than just its price. In its 10-K for 2019, Amphenol describes itself as, “one of the world’s largest designers, manufacturers and marketers of electrical, electronic and fiber optic connectors and interconnect systems, antennas, sensors and sensor-based products and coaxial and high-speed specialty cable.” It’s also an interesting study in diversification for investors who like to cover multiple bases with one stock. This graphic from the 2019 Annual Report shows how it has diversified by pursuing different markets:

GuruFocus Amphenol market segments

Note that the company does not want any single segment to exceed 20% of sales, and the segments are divided into longer cycles and shorter cycles. It has also diversified geographically, with 31% of its net sales coming from the U.S while the other 69% coming from other countries. China is a major market responsible for about 28% of its annual sales.

Despite the apparent currency and geopolitical risks of doing so much of its business abroad, the company has done well over the past decade. President and CEO R. Adam Norwitt wrote in the Annual Report that the company’s metrics included compound annual sales growth of 11%, adjusted EPS growth of 15% and adjusted operating margin expansion of more than 250 basis points. According to Norwitt, that allowed the Amphenol stock price to register 18% compound annual growth, “significantly exceeding” the S&P 500's performance over the decade.

Looking at its metrics in GuruFocus system, we see that the company is about average in terms of its financial strength:

GuruFocus Amphenol financial strength

However, the situation is bright for its profitability. Favorable scores include operating margin, Piotroski F-Score, the five-year trend of the operating margin, consistency of profitability and predictability rank:

GuruFocus Amphenol profitability

GuruFocus gives Amphenol a business predictability rating of five out five stars . Five-star stocks average annual returns of 12.1% per year over 10 years, and there is only a 3% chance the stock will give negative returns over a 10-year holding period based on historical trends.

The company also has a competitive advantage according to the Macpherson model, which measures this through a 10-year median of at least 15% for return on capital (ROC) and return on tangible equity (ROTE). Amphenol’s ROC has been below 15% only once in the past 10 years. Its ROTE has been exceptional for a non-tech company, with a median of 167.77% over the past decade. 

However, its valuation may still be high, despite being lower than it was in recent history:

GuruFocus Amphenol valuation

That low rating is backed up by the results in the discounted cash flow (DCF) calculator, which estimates its intrinsic value at $64.14, well below the current price of $93.99. Still, as we noted above, it doesn’t seem overpriced in context, according to the 10-year price chart for Amphenol:

GuruFocus Amphenol price chart

Gurus have also become net buyers of the stock recnetly, as shown in the chart below. Eight gurus have positions in Amphenol, the largest held by Pioneer Investments (TradesPortfolio) with 3.2 million shares at the end of March. Ron Baron (TradesPortfolio) of Baron Funds held 514,545 shares and Jim Simons (TradesPortfolio) of Renaissance Technologies held 443,600 shares.GuruFocus Amphenol guru buys and sells

What’s ahead?

Regarding the first-quarter earnings, Norwitt wrote:

“The first quarter 2020 was significantly impacted by the COVID-19 pandemic. Since the shutdown of Wuhan, China on January 23, Amphenol’s entire global organization has been managing through the extreme challenges created by the outbreak. Starting in late January, our team in China successfully navigated a nearly three-week shutdown of all of their manufacturing operations, and were able to return to full production levels by the beginning of March.”

While the short-term results are disappointing, the longer-term should see Amphenol resuming its solid growth and profitability. The company invests significant amounts in research and development, working on projects designed to deliver new sales and revenue in one to three years.

For my part, I’m sure I’ll be buying more cables for all the electronic devices on my desk in the future, as will most of us. Amphenol is also likely to keep finding new products given its research and development budget and its acquisition of compatible companies.

Conclusion

The current economic crises have depressed the price of Amphenol, making it attractive for investors willing to pay for growth.

Value investors may not be attracted to its debt and the lack of a margin of safety, but this seems to me to be a well-managed company with a great deal of promise in the medium and long terms.

Disclosure: I do not own shares in any companies named in this article and do not expect to buy any in the next 72 hours.

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About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995 and in 2010 added options -- mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate-level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the "unseen revolution."

Visit Robert Abbott's Website


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