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Amphenol (APH) Down 6.4% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Amphenol (APH). Shares have lost about 6.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Amphenol due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Amphenol's Q2 Earnings Benefit from Strong End-Markets

Amphenol reported second-quarter 2019 adjusted earnings of 92 cents per share that missed the Zacks Consensus Estimate by a penny but increased 2.2% from the year-ago quarter’s figure.

Net sales increased 1.7% year over year to $2.02 billion, which was slightly better than the consensus mark of $2.01 billion. Unfavorable foreign exchange negatively impacted sales by $42 million.

Amphenol slashed guidance for 2019. The company expects demand for its solutions to be moderate in some of the end markets, particularly communications equipment, automobile and industrial.

The company stated that restrictions imposed by the U.S. government on sales to certain Chinese entities are negatively impacting demand. Moreover, increased level of uncertainty in the global economy is a major concern.

The year-over-year increase in revenues was driven by strong growth across the company’s end markets, including military, commercial air, mobile networks and mobile devices. Acquisitions also helped in driving the top line.

Interconnect Products and Assemblies (95.5% of net sales) sales increased 3% from the year-ago quarter to $1.93 billion. However, Cable Products and Solutions sales were $89.7 million, down 19.3% year over year.

Gross margin contracted almost 40 basis points (bps) on a year-over-year basis to 32.1%.

Selling, general and administrative expenses (SG&A) as percentage of revenues declined 10 bps to 11.9%.

Consolidated operating margin contracted 30 bps on a year-over-year basis to 20.3%, driven by improved operational efficiency.

Segment wise, Interconnect Products and Assemblies operating margin declined 20 bps to 22.2%, while Cable Products and Solutions operating margin contracted 350 bps to 9.7%.

In June, Amphenol acquired CONEC Elektronische Bauelemente GmbH and Kopek Industries.

Based in Germany, CONEC designs and manufactures a wide array of connectors primarily for customers in the industrial market. Kopek, which is based in China, primarily supplies RF passive interconnect components for the broadband market to Amphenol.

In July, the company purchased Bernd Richter GmbH and the GJM Group.

Based in Germany, Bernd Richter designs and manufactures high-technology cable assemblies primarily for medical equipment customers. Spain-based GJM is a provider of interconnect assemblies for automotive applications.

These four acquisitions collectively generate annual sales of approximately $150 million.

As of Jun 30, 2019, Amphenol had cash and cash equivalents worth $997 million, lower than $1.29 billion as of Mar 31, 2019.

Cash flow from operations was $322 million compared with $344 million in the previous quarter.

During the quarter, the company repurchased 2.6 million shares for $249 million.

On Jul 23, 2019, Amphenol’s board of directors approved a 9% dividend hike, taking the value to 25 cents from 23 cents per share.

Guidance

For the third quarter of 2019, Amphenol projects sales between $1.960 billion and $2 billion.

Adjusted earnings are expected between 86 cents and 88 cents per share.

For 2019, Amphenol expects sales between $7.920 billion and $8 billion, down from the previous guidance of $8.130-$8.250 billion. The latest guidance range indicates sales to decline 2-3% year over year.

Moreover, the company now expects adjusted earnings of $3.56-$3.60 per share, down from the previous guidance of $3.80-$3.86. The latest guidance indicates a decrease of 5-6% year over year.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -11.2% due to these changes.

VGM Scores

At this time, Amphenol has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Amphenol has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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