Is Amphenol Stock A Buy?

Amphenol Corporation (NYSE:APH) is a fiber optic producer with applications for military, industrial, aerospace, and automotive industries. Its biggest revenue source can be found in the the race to 5G though. Data providers are rushing to lay high-speed fiber optics to run both landline and mobile broadband.

Fiber optics has proven its value, which means potentially a big opportunity for APH share price. That leads investors to wonder: is Amphenol stock a Buy?

APH stock has been trading at a historically high market capitalization on the back of positive news and sales from the 5G war. Consensus earnings estimates continue to rise, and the company continues to meet or exceed them. 

As the world has turned ever more from offline to online, Amphenol has supplied the fiber optics necessary to transmit data in this increasingly digital world.

What are the chances of Amphenol winning the 5G war and what it will do once (if ever) that buildout is complete?

What Exactly Does Amphenol Do?

From a product perspective, Amphenol Corporation services the fiber optic market, along with creating electronic components for other uses. This includes manufacturing fiber optic cabling, connectors, panels, adapters, and more.

Because it serves a wide variety of applications, this could include everything from under-ocean broadband to Christmas lights at home.

These days fiber optics are everywhere, and this foundational company supplies necessary parts to make everything happen. As the internet continues to speed up, you have fiber optics to thank.

That’s not APH’s only market though. It also manufactures coaxial and flat-ribbon cables, along with the appropriate interconnect systems.

On the financial side, the company is active in snapping up competitors, rivals, and innovative technologies. Via mergers and acquisitions, it has acquired SV Microwave, Jaybeam Wireless, and others.

It also purchased GE’s Advanced Sensors Business. This helped it branch into a variety of related income streams without disturbing its main source of revenue.

The financial growth makes it clear that customers around the world are buying the company’s products, but is Amphenol stock a good investment?

Is Amphenol Stock A Buy?

Amphenol market capitalization have reached historic highs of around $40 billion.

That market cap translate to a P/E ratio around 35x, a lofty figure when compared to rivals. It Is also more than double the company’s 52-week low of $63.05.

The company’s third quarter earnings report in late October showed diluted earnings per share of $1.12, an increase from $0.92 in the same quarter of 2019. This included an $11 million excess tax benefit for stock options exercised in the quarter. It still would’ve outpaced earnings without it though.

Amphenol’s Board of Directors also voted in October to approve a 16 percent quarterly dividend increase. It raised from $0.25 to $0.29 per share starting with the next disbursement. This makes it a viable hold over the near term in the eyes of bullish investors.

Bearish investors, however, worry that the return to normal economic conditions will slow the company’s short-term growth while it’s bottlenecked on the backend by the end of the 5G upgrade. And then there are other reasons to be concerned.

Risks of Investing in Amphenol Stock

There’s no denying the pandemic has forever left its mark as the defining event of 2020. Worldwide shutdown orders and protests peppered a tumultuous year, both politically and economically. As the world pushed to a virtual environment, interest in a fiber optics company grew.

While we talk a lot about the race to 5G like it’s an upcoming event, the reality is many carriers already offer it in most major cities. That means the secondary effort of connecting rural areas is underway.

This is an expensive endeavor because of geographic distances needing to be covered. But it also means costs could be cut by smaller municipalities.

Look at it this way – when do you ever remember getting great cell service in rural America?

Amphenol could find itself needing to shift manufacturing capabilities to keep up once the 5G race is completed. It could also find itself a casualty in an escalated trade war with the United States.

It’s not uncommon for technologies to be banned, and several Chinese and American firms already felt that heat.

Moreover, don’t underestimate the competition.

Can Amphenol Competitors Win?

Amphenol isn’t the only electronic components manufacturer on the block. It’s competing with the likes of CommScope (COMM), Delphi Technologies, Smiths Interconnect, and TTM Technologies (TTMI). Each company is looking to expand its revenue, and they’ll inevitably run into each other.

The strengths Amphenol needs to leverage are securing high-value B2B and government contracts. These provide a steady, dependable income stream that’s much more cost-effective than one-by-one sales.

Customer acquisition is one of the highest costs in business, and whomever lands the big contracts gains a big foothold over competitors. With that said, Amphenol has so far proven resilient enough to wage war against these other market players. Just be aware it’s not alone.

There is especially strong competition in Shenzhen. This manufacturing hub in Southeast Asia is responsible for a large part of global electronics manufacturing. Amphenol needs to remain nimble to stay competitive in a brutal market.

Is Amphenol Stock A Buy? The Bottom Line

Amphenol Corporation is a leading global manufacturer of fiber optics and electronic components. While cables and connectors may not sound sexy, the company earned $336 million in the third quarter of 2020 alone. That’s nothing to sneeze at and demonstrates it’s in a highly profitable market.

That shot its market capitalization up to historic highs for the fourth quarter and year end.

As the 5G war heats up, bullish analysts believe Amphenol is a good short-term bet for outperforming the market over the next two-five years. This is because of guaranteed income and cash on hand to build a solid runway for that timeframe.

However, economic destabilization could cause a shortage in orders to this major supplier. It’s something already seen with Boeing (BA) jet engines while airlines were grounded, for example. Should the 5G race be put on hold as the pandemic economy recovers to normalcy, investors could find themselves holding the bag on a stale investment.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.