Amphenol Earnings: Great Execution and Profitability in a Challenging Year, Valuation Maintained

We maintain our $83 fair value estimate for Amphenol APH shares after second-quarter results beat guidance but third-quarter results modestly missed our expectations. Communications and consumer-facing end markets continue to be soft, but we like to see ongoing strength out of automotive and military sales. We are also pleased with improving orders across end markets as a positive leading indicator for results. Amphenol’s best-in-class margins once again impressed in the quarter. The firm’s ability to consistently execute on profitability is a large tenet of our wide-moat thesis on the blue chip company. At present, we don’t love Amphenol’s valuation, but it is a fundamentally terrific name for investors to buy upon a pullback.

Second-quarter sales declined 3% year over year to $3.05 billion but rose 3% sequentially. Declines were led by communications-related markets. Data center customers are working through higher inventories stocked up during a surge in postpandemic demand, and Amphenol has a greater mix of these sales than a competitor like TE Connectivity. Management also called out moderation in industrial, where we believe similar inventory destocking is occurring. All other markets look healthy, with particularly good growth in automotive sales and Amphenol’s flagship military business.

Amphenol’s non-GAAP operating margin rose 30 basis points sequentially to 20.4%, a great level, representing a 30-basis-point decline year over year that we attribute wholly to lower volumes. The firm’s ability to post great profits in rocky end markets gives us confidence on its results through market cycles.

Third-quarter guidance implies modest sequential growth in the top and bottom lines, with continuing strength in auto and military, improvement in communications, and some newfound pockets of weakness in industrial markets. Sales are expected to be $3.07 billion at the midpoint, and we expect a slight sequential uptick in operating margin.