The Long and Short
Amphenol managing growth ambitions
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Amphenol (APH: Baa1/A-) is experiencing tremendous growth at the moment with market cap nearly doubling over the past several years. This’ is being spurred seemingly on two fronts, as the company just closed one acquisition and announced a second of just over $2 billion each, and also has been experiencing considerable organic growth due to heightened demand in key end markets, namely AI. Most importantly, APH is executing this growth strategy and appeasing shareholders without having meaningful long-term negative impact on leverage or its overall credit profile. The name looks like good relative value.
As the graph below demonstrates, the APH credit curve is notably steeper than the rest of the diversified manufacturing segment (Exhibit 1). This is not altogether surprising given the exposure to IT and cyclical nature of its end markets, but nevertheless the notes seem to offer particularly good value within the peer group of high-‘BBB/low-‘A’ credits within that part of the curve.
Exhibit 1. APH shows a much steeper curve in intermediate maturities
Source: Santander US Capital Markets LLC, Bloomberg/TRACE G-spread indications
APH is one of the top global producers of all manner of connectivity equipment and technology. They hold the number two position behind Tyco Electronics. The company designs and manufactures electrical, electronic and fiber optic connectors, as well as interconnect systems, fiber optics, antennas, and other technology that enable high-speed data to be transmitted. APH’s products are utilized by a variety of industries including military/aerospace, cable, telephone, and data communication IT including, which includes rapidly expanding AI data centers. The company is well-diversified geographically generating over 40% of its revenue outside the US and China, with about 35% domestically and 23% in China. Although elements of its end markets are cyclical in nature, the company operates with consistently high profit margins. APH boasts an EBITDA margin that has maintained in the 24% to 25% range over the past five years, and has remained higher than that of other industry bellwethers, such as Tyco and Corning (Exhibit 2).
Exhibit 2. Key Credit Metrics for APH compared to comparables
Source: Standard & Poor’s Financial Services LLC adjusted figures
The $2.025 billion all-cash acquisition of Carlisle Interconnect Technologies just closed in late May 2024. Shortly thereafter, they announced the all-cash acquisition of Commscope Holding Co’s mobile networks businesses for $2.1 billion, which is expected to close within the first half of next year. As a result, APH is expected to generate double-digit revenue growth in both the current year and next year. AI data center investments is also experiencing considerable organic growth at the moment, helping offset some of the relative softness in mobile and broadband networks and contributing to the overall growth story.
Leverage increased slightly with the closing of the first acquisition to about 1.3x from 1.0x at year-end 2023. S&P projects that leverage will further increase to the mid 1x range with the closing of the next acquisition, depending on the exact funding mix, but will not consider a downgrade as long as debt-to-EBITDA remains below 2.0x. The company brought just over $1 billion of new debt across two tranches back in April of this year to help fund the Carlisle acquisition.
Most importantly, the company’s liquidity profile continues to be solid, even as it carries out its growth strategy. The cash balance stood at $1.66 billion at year-end 2023 and is reported to be right around $1.3 billion as of the most recent quarter-end following the close of the Carlisle deal. APH also has its entire $3.0 billion revolving credit facility available to it through 2029. There are no debt maturities for the remainder of 2024, and just $400 million due in the following year. This leaves plenty of flexibility for management to continue with moderate shareholder payouts and to fund the upcoming closing of the second acquisition without putting their current ratings at risk. It would not be surprising to see them bring another debt deal leading up to the closing of that acquisition, but again it seems that the company has plenty of financial flexibility to do so without putting too much pressure on the overall credit profile.
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