A month has gone by since the last earnings report for Amphenol (APH). Shares were flat in that time frame, underperforming the S&P 500.
Will the recent trend continue leading up to its next earnings release, or is Amphenol due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Amphenol Q3 Earnings Beat Estimates, Revenues Down Y/Y
Amphenol reported third-quarter 2019 adjusted earnings of 95 cents per share that beat the Zacks Consensus Estimate by eight cents but declined 4% from the year-ago quarter’s figure.
Net sales decreased 1.3% year over year to $2.10 billion, which was slightly better than the consensus mark of $1.99 billion. Unfavorable foreign exchange impacted sales by $24 million.
At constant currency (cc), net sales were flat. Excluding acquisitions and currency impacts, sales decreased 6% year over year.
Orders were worth $2.091 billion, which was down 1% year over year. This resulted in a book-to-bill ratio of 1:1.
The year-over-year decrease in revenues was primarily due to weakness in industrial, automotive and communications end markets.
Interconnect Products and Assemblies (95.2% of net sales) sales decreased 0.9% from the year-ago quarter to $2 billion. At cc, net sales were flat on a year-over-year basis.
Moreover, Cable Products and Solutions sales were $99.8 million, down 9% year over year. At cc, net sales declined 8% year over year.
Gross margin contracted 80 basis points (bps) on a year-over-year basis to 31.5%.
Selling, general and administrative expenses (SG&A) as a percentage of revenues increased 40 bps to 11.8%.
Consolidated operating margin contracted 120 bps on a year-over-year basis to 19.7%.
Segment-wise, Interconnect Products and Assemblies operating margin shrank 100 bps to 21.7%, while Cable Products and Solutions operating margin contracted 290 bps to 10.2%.
Interconnect Products and Assemblies margin contracted due to restructuring costs and negative impact from acquisitions, which are currently operating at a profitability level below the company average.
Cable Products and Solutions margins shrank due to lower volume and unfavorable product mix.
During the quarter, Amphenol bought China-based XGiga Communication Technology and U.K.-based Cablescan for roughly $87 million in total.
XGiga designs and manufactures active fiber optic interconnect components used primarily in communications infrastructure markets.
Cablescan designs and manufactures high-technology interconnect assemblies for military and commercial aerospace markets.
Balance Sheet and Cash Flow
As of Sep 30, 2019, Amphenol had cash and cash equivalents worth $986.7 million, lower than $997 million as of Jun 30, 2019.
On Sep 4, the company launched a $900-million U.S. bond offering, which has a 10-year term and bears interest at 2.8%. Moreover, in combination with the U.S. senior note issuance on Sep 11, the company tendered $147 million of its $375 million 3.125% U.S. senior notes and $205 million of its $500 million 4% U.S. senior notes.
These offerings strengthened Amphenol’s capital structure by extending its average debt maturities by roughly two years, while keeping average effective interest rate on outstanding borrowings unchanged.
As of Sept 30, the company had issued approximately $754 million (including the new bond offerings) under its U.S. and Euro commercial paper programs. The company's cash available under credit facilities totaled nearly $2.7 billion.
Total debt as of Sep 30 was approximately $3.9 billion and net debt was approximately $3 billion.
Cash flow from operations was $412 million compared with $322 million in the previous quarter. Free cash flow was $341 million or 117% of adjusted net income.
During the quarter, the company repurchased 1.7 million shares for $150 million.
For the fourth quarter of 2019, Amphenol projects sales between $1.960 billion and $2 billion. Adjusted earnings are expected between 89 cents and 91 cents per share.
For 2019, Amphenol expects sales between $8.035 billion and $8.075 billion, up from the previous guidance of $7.920-$8 billion. The latest guidance indicates a year-over-year sales decline of 2%. Unfavorable currency fluctuation is expected to hurt sales by roughly $30 million.
Moreover, the company now expects adjusted earnings of $3.65-$3.67 per share, up from the previous guidance of $3.56-$3.60. The latest guidance indicates a decrease of 3% year over year.
Military end-market sales are expected to increase modestly from in the fourth quarter. For 2019, sales growth is expected to be above 20%.
Commercial aerospace end-market sales are expected to increase modestly from third-quarter levels. For 2019, management continues to expect a low-double-digit increase in sales year over year.
Moreover, for the fourth quarter, slowing demand in Europe is expected to hurt sales from industrial end market. For 2019, Amphenol now expects growth in low-single digits, a modest decline from its prior expectations, due to lowered demand outlook from distributors and OEM customers.
Additionally, sales from the automotive end market are expected to decline slightly in the fourth quarter, while full-year sales are expected to increase slightly year over year.
Mobile devices end-market sales are also expected to moderate from third-quarter levels in the fourth quarter. For 2019, Amphenol now expects sales decline in the mid 20% range, an improvement from its previous guidance of roughly 30% decline from the prior year.
However, mobile networks end-market sales are expected to further decline in the fourth quarter. For 2019, sales are expected to be flat year over year. Organically, sales are expected to decline in high-single digits due to lower demand from OEM and operator customers.
Information technology and data communications end-market sales are expected to moderate from third-quarter levels in the fourth quarter. For full-year 2019, management anticipates a decline in the low-single-digit range.
Broadband sales are expected to moderate seasonally in the fourth quarter. Moreover, 2019 sales are expected to decline in the high-single-digit range year over year due to reduced investments by broadband operators.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month.
At this time, Amphenol has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of this revision has been net zero. Notably, Amphenol has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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