MOLX Molex Incorporated (MM)

We recently reiterated our Neutral recommendation on Amphenol Corporation (APH).

Amphenol’s top-line growth is benefiting from improved end-market demand, new product rollouts and market share gains. Amphenol is encouraged by a significant improvement in global demand over the last few quarters and is optimistic about the accelerating proliferation of new electronics in all its end-markets.

Most of the end-markets are poised to grow with signs of economic recovery. Demand continues to be strong in Information Technology, Data Communications Equipment, Industrial and Wireless Devices, along with a revival in the automotive business.

We remain particularly optimistic about Amphenol’s long-term growth prospects in the mobile devices business. Demand for mobile phones remains strong. Beyond mobile phones, the company continues to expand the use of its products into fast growing sub-markets such as PDAs, laptops and desktop computers. In addition, a rebound in commercial aerospace production (expected in 2011) should also boost the company’s business in this market driven by Airbus-A380 and Boeing-787.

Meanwhile, margins continue to be impressive. We remain impressed by Amphenol’s operational execution leading to solid improvement in margins compared to its peers such as Molex (MOLX) and Tyco Electronics (TEL) along with strong cash flow generation.

Amphenol posted a net income of $131.1 million or $0.74 per share in the fourth quarter of fiscal 2010 compared with a net income of $87.6 million or $0.50 per share in the year-earlier quarter, beating the Zacks Consensus Estimate of $0.73.

On the basis of the improvement in global demand coupled with stabilization of demand patterns, Amphenol projects sales between $925 million and $940 million for the first quarter of fiscal 2011. Earnings per share are forecasted between $0.70 and $0.72.

For fiscal 2011, management projected revenues between $3,885 million and $3,960 million. EPS is expected between $3.00 and $3.10.

However, earnings estimates for fiscal 2011 have moved slightly lower of late. We expect a slowdown in military spending due to defense budget cuts as announced in February 2011. Orders are expected to slow down through April. This will hurt sales from this end-market, which contributes approximately 20% of total sales. This, in turn, might restrict growth in the coming quarters.

We continue to maintain a Neutral recommendation on Amphenol. However, while we are encouraged by the improvement in overall economic conditions, we currently have a Zacks #4 Rank (short-term Sell rating) on the stock as we believe that demand is still not very strong and certain and there will be pressure on the stock in the near-term driven by the slowdown in orders in the first quarter.

 
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