Will Amphenol’s Earnings Impress Once Again?

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Electrical product manufacturer Amphenol (NYSE: APH) is scheduled to release fourth-quarter results on January 17th. Earnings per share has exceeded analyst consensus estimates in each of the last four quarters, including a record showing of $0.90 for the September period. Expectations are that it will match that figure when it reports profits this week. Shareholders appear optimistic, with the shares having attained a 52-week apex recently.

Here’s why the company may well remain on a roll.

End market strength

Sales to the automotive, aerospace, industrial, telecom, and datacom sectors have been on the rise. Plus, demand from the mobile market is bouncing back behind a surge in mobile computing revenue.

For reference, about 60% of revenues last year stemmed from Information Technology & Communications, while the Industrial/Automotive and Commercial Aerospace & Military markets contributed approximately 20% each. Favorable conditions in these markets should drive ongoing jumps in sales of Amphenol’s connectors and interconnect systems.

Margin expansion

Revenues likely climbed about 8% in 2012, supporting an EPS increase of 12% to 13%. Management thanks lean production for the profitability improvement. Amphenol is realizing operating expense leverage due to the sales upturn, a factor that probably boosted earnings again in the December quarter, and something to anticipate in 2013.

Acquistions and share buybacks

Amphenol is putting its cash to good use. It completed two modestly-sized buyouts during the September quarter, specifically Holland Electronics, a broadband and satellite communications market supplier, as well as Griffith Enterprises, serving the commercial aerospace market. The board is repurchasing stock at a significant pace, allowing for higher share earnings. Furthermore, Amphenol pays a small dividend, yielding about 0.6%.

It is nearly certain that the company will look to further build its asset base, purchasing companies in high-growth sectors with complementary capabilities that are poised to be accretive to the bottom line in the first year after consummation. Amphenol is amassing debt, though its liquidity position is still solid, as based on its elevated current ratio. The company could well limit its exposure to cyclicality in the electrical product market by way of an increased electronics and broadband/wireless communications presence.

Wireless infrastructure a long-term growth contributor

Amphenol did not suffer from the downturn in telecom equipment spending in 2012 as much as some other companies. Rather, it is building its clientele base in this business and releasing new server and data center offerings.

As this market picks up, Amphenol ought to be well-positioned to benefit from rising customer performance requirements and rollouts of next-generation telecom systems.

Other electrical product companies’ earnings

Hubbell (NYSE: HUB-B) plans to report results on the 24th of this month. Analysts think earnings were about $1.20 a share. Unlike Amphenol, Hubbell is largely a traditional electrical product maker, serving industrial maintenance, repair and operations (MRO), commercial and institutional facility purposes. Its business units consist of electrical products, lighting systems and utility products. Hubbell is, however, also seeing its earnings climb and shares achieve new 52-week highs. Hubbell is a large ($5.2 billion market capitalization), company with a diverse customer contingency. Accordingly, the stock's beta is relatively low within the industry. It offers upside for more conservative investors looking for sector exposure.

Also, lighting producer Acuity Brands (NYSE: AYI) recently posted November-quarter share earnings of $0.69, versus $0.74 in the previous year. Although Acuity is probably benefiting from heightened construction and refurbishment activity, investments in operations will likely restrain earnings through the first (February) quarter, while the effects of last year's streamlining measures continue to kick in. Subsequently, there is the possibility that profits will surge upward. AYI shares already reflect this anticipated earnings turnaround, though, limiting their appreciation potential.  

The stocks

Amphenol shares’ price already partly reflects the positive expected earnings momentum, too. As such, an upside surprise or forecast may well not move the stock substantially. Of the three issues mentioned here, Hubbell appears the best purchase at this time, particularly if earnings exceed forecasts.  

dctotal has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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