Amphenol Earnings: Market Weakness Creates Rare Buying Opportunity for Unflappable Operator

We maintain our $83 per share fair value estimate for Amphenol APH after a strong first quarter and guidance for second-quarter moderation. Inventory digestion at data center and mobile network customers is depressing demand for Amphenol’s communications products, but other end markets remain healthy. Despite a downturn in several of its markets, Amphenol’s profitability shows remarkable resilience. The firm’s ability to efficiently manage expenses with a localized cost structure, even during periods of weak demand, is a key tenet of our wide economic moat and exemplary capital allocation ratings. Amphenol stock is trading more than 10% below our fair value estimate in response to short-term market weakness. We see its modest selloff as short-sighted and recommend investors buy into the blue-chip company while it’s at a discount.

First-quarter sales dropped 8% sequentially to $2.97 billion behind weak communications demand but rose 1% year over year, beating guidance and our above-consensus expectations. Communications sales dropped 15% year over year and 22% sequentially due to inventory digestion at customers following immense orders during 2021 and 2022. Automotive, industrial, and military sales growth offset most of the weakness as demand in these areas remains healthy. We remain impressed with Amphenol’s ability to execute in the automotive market in particular, where weakness out of China has prompted more caution from peers.

Non-GAAP operating margin dropped 80 basis points sequentially to 20.1% but rose 10 basis points year over year. We view this as still an impressive level during a weak period, and don’t forecast this figure to dip below 20% even with communications struggles.

Second-quarter guidance calls for a modest sequential sales decline stemming from communications softness. Still, we don’t think that market is far off from a trough, and we expect Amphenol to beat its guidance range as has become its custom.