While Amphenol Corporation (APH) is convalescing in most of its end-market segments and is making incipient headways in attaining its long-term targets, certain lingering downsides still pose a threat to the stock. Hence, we retain our Neutral recommendation on Amphenol.
Amphenol has an impressive cost-cutting and labor productivity maximization strategy which also bolsters its multi-national image in the global economy. With manufacturing units in countries like China, Mexico, India, etc, the company avails of low-cost labor which provides a considerable cushion to its operational productivity. Moreover, Amphenol has functional offices at major developed economies too such as Australia and Europe besides the Americas.
The company has always looked for profitable acquisitions backed by a strong cash balance. Recently, in 2011, Amphenol spent around $303 million in making two acquisitions in its automotive end-market segment. This was done with the primary intent of expanding its product database.
Another impressive aspect of the stock is the various measures that the company takes to cater to its investors’ needs. A quarterly dividend hike from 1.5 cents per share to 10.5 cents per share was announced by the company on January 26, 2012.
Not long before that, the company announced senior notes pricing of $500 million principal amount due in 2022. Moreover, Amphenol spent $138 million to buy back 3 million shares in 2011, leaving the company with 6.6 million shares remaining under its existing 20 million share repurchase program, which is due to expire in January 2014.
Now, even though the upsides look quite encouraging for Amphenol, there are certain headwinds that can make it difficult for the company to sustain its performance in the long run. One such deterrent is the Germany-based FEP acquisition. Though beneficial, the FEP integration may pose margin pressure for the company near term.
Looking back at 2011 performance, some usually high-performing end markets posted deteriorating results. Moreover, margins were under pressure bearing the added costs from earlier Sidney (NY) floods.
Amphenol’s international businesses fueled nearly 68% of sales for the company in 2011. The company’s substantial overseas sales expose it to the risk of foreign currency rate fluctuations, which can mar profitability irrespective of its real performance.
The company faces intense competition from big players such as Molex Inc. (MOLX), Thomas & Betts Corp. (:TNB) and Methode Electronics Inc. (MEI). Judging by its present condition, we find it prudent to maintain a sideline view on the company’s stock, maintaining our Neutral rating for the long term.
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