In the investing business, boring is often good. It means investors do not have to look over their shoulders or stay awake at night. They do not wonder if the equities they own are taking a random walk down Wall Street, as the title of a book by Burton Malkiel put it.
It is no surprise, then, that Mawer Investment Management brags about that quality in a website headline, “Boring, long-term investing since 1974.” And it might be expected it would use that term of endearment for companies that chugged along steadily. As it wrote in its third-quarter 2022 commentary:
“Businesses we would define as 'boring' were some of the stronger performing stocks in the quarter. Holdings such as insurance broker Aon (AON, Financial), reference data provider Wolters Kluwer (XAMS:WKL, Financial) and manufacturer of electronic connectors and cables Amphenol (APH, Financial), posted steady increases in revenues and operating profits reflecting the stability of their businesses.”
About Amphenol
Based in Wallingford, Connecticut, the company has a market cap of $48 billion and has trailing 12-month revenue of $12.41 billion.
In its third-quarter 2022 earnings release, the company described 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.” This screenshot from its website shows the main products:
Competition
Amphenol reported in its 10-K for 2022 that it faces competition in all its businesses. The first three competitors named were Aptiv PLC (APTV, Financial), Belden Inc. (BDC, Financial) and Carlisle Companies Inc. (CSL, Financial). It went on to note that competition is based on “technology innovation, product quality and performance, price, customer service and delivery time.”
The company believes its main competitive advantage is its global presence, because it can service its multinational customers on a “timely and worldwide” basis.
The annual report provides this chart, showing how it outperforms both the S&P 500 and a peer index:
What it takes to be a stalwart stock
The idea and name for "stalwart" stocks comes from guru Peter Lynch and his book, “One Up on Wall Street: How to Use What You Already Know to Make Money in the Market."
He divided stocks into several categories, and on that list, stalwarts were large-cap stocks that were growing at a medium pace and could be the backbone of a recession-resistant portfolio.
GuruFocus provides a screener to find stalwarts, using a set of criteria that corresponds with Lynch’s thinking. The Stalwarts screener has these criteria: Good business predictability, return on capital averaging at least 14% over the past decade, revenue growth averaging between 8% and 20% over the same period and earnings per share without non-recurring items growth of 10% to 20% per year over the past 10 years.
Amphenol meets all these criteria, so I consider it a bedrock type of stock—no great spurts of growth, but also no serious share price slumps.
Its strength comes from an attractive set of fundamentals, pulling a GF Score of 97 out of 100. This means the company has high outperformance potential going forward.
Fundamentals
Financially, it scores a 7 out of 10 financial strength ranking, which is reasonable but not exciting. One reason it did not get full marks is the growing amount of debt.
Still, it has a respectable interest coverage ratio of 21.13, meaning it generates $21.13 in operating income for every dollar of interest on its debt. It also has a high Altman Z-Score of 5.53, which GuruFocus considers “safe.”
For profitability, it earns a full 10 out of 10 score, despite some slippage in its gross margin. On the other hand, its operating and net margins are industry-leading at 20.46% and 14.99%. It has been profitable every year for the past decade.
Over the past decade, Amphenol has grown its revenue by an average of 10.59% per year, thus being within the stalwart criteria. This resulted in a growth rank of a perfect 10.
Ebitda has grown at nearly the same rate, an average of 11% per year over the past decade. Earnings per share without NRI also hits the mark with an average of 12.12% per year over the past decade.
With such consistency in the growth of revenue and Ebitda, Amphenol receives a perfect 5 out of 5 stars for predictability. That is relatively rare, only 205 of the 12,720 stocks evaluated by GuruFocus can meet this high standard.
A dividend comes with the stock, although its yield is currently just 0.99%. The yield may be a victim of the share price’s consistent growth. But by itself, the yield is just part of the picture; when I look more closely, I see the dividends per share have grown by an average of 30.81% per year over the past 10 years.
The company also has been returning value to shareholders by reducing the share count, an average reduction of 0.84% per year over the past decade.
On valuation, the share price has risen consistently, even over the past year when so many other companies were pulled down by the market-wide slump.
The GF Value chart concludes Amphenol is fairly valued. It sees intrinsic value of $85.37, while the closing price on Dec. 2 was around $80.62.
Gurus
Six gurus owned Amphenol at the end of the third quarter. Ron Baron (Trades, Portfolio) of Baron Funds held 1,022,985 shares, representing a 0.17% stake in the company and 0.22% of the fund’s assets under management. Jim Simons (Trades, Portfolio)' Renaissance Technologies had a position of 864,500 shares, while Paul Tudor Jones (Trades, Portfolio) of Tudor Investment owned 214,837 shares. Baron and Jones increased their holdings during the quarter, while Simons' firm cut back.
Institutional investors have 97.71% of the shares outstanding, while insiders own 0.31%.
Conclusion
Amphenol is worth a look by investors who see high potential for a recession. The stock weathered the pandemic, supply chain challenges and more to keep its earnings on track. Investors returned the favor by holding onto their shares.
Given its history over the past few rocky years, Amphenol may be capable of protecting investors if another bout of hard times descends upon us.
