Amphenol

From tube radio sockets to connectors

Good grief, what's going on at Tesla again? Nearly 50 percent share price gain within about 3 weeks. At this point I simply have to congratulate all Tesla shareholders. I've been watching the stock for a while, but I was never willing to buy in at these prices. One thing is certain, though: demand for electric cars and trucks will rise significantly due to growing environmental awareness and political regulation. But whether Tesla will keep its position as top dog in the future is hard for me to judge. For exactly that reason, I've picked out a supplier that will benefit from electric mobility as well as many other strong growth trends, without me having to bet on a single car brand.

The Amphenol Corporation, headquartered in Wallingford (Connecticut), is one of the leading manufacturers of a wide range of electronic components, such as connectors, sensors or cables, which are used in all kinds of industries (automotive, aerospace, broadband expansion, and much more). Let's take a closer look at this pick-and-shovel seller today.

The history and business model of Amphenol Corp.

The origins of today's connector group go back to Arthur John Schmitt, who was born on June 14, 1893 in Austin (Illinois). His parents Henry and Barbara ran a leather goods store, where Arthur helped out from an early age. However, he soon discovered his passion for inventing and started working in a small machine shop. As a teenager he dropped out of high school after only two years - he was bored by a system that was geared only toward average students. At 18, Arthur discovered his fascination with flying, and within a year he was flying his own airplane. After an unfortunate crash his father forbade him to fly, so Arthur took the engine out of the plane and built a three-wheeled, propeller-driven car that could actually go faster than 80 km/h. Thanks to his skilled craftsmanship he quickly found a few jobs before taking a position as plant manager at the Sterling Milling Company. Although this position exempted him from the draft for World War I, Arthur actively worked to be accepted into naval aviation. While stationed in South Carolina, he tinkered and fiddled with radios and found a new calling in it.

After the end of World War I he moved to Chicago and began manufacturing various radio components. About five years later, he decided together with his colleague Walter Horn to found the Walnart Manufacturing Company and to focus entirely on manufacturing radio and electrical components. The two benefited from the up-and-coming radio industry and their business developed solidly. In 1928 they merged with the Continental-Diamond Fiber Company. Unfortunately, shortly afterwards they were forced to file for bankruptcy, as they couldn't withstand the devastating effects of the Great Depression. Arthur wasn't discouraged by this in the slightest and founded another company in 1932, this time The American Phenolic Corporation. He recognized the growing potential of tube radios for home use and therefore looked for a more efficient way to produce the required vacuum tube sockets. He soon discovered that insulating plastic was much better suited for production than the ceramic that was usually used. That same year he filed his first of many patents to come.

During World War II, the young company experienced a real boom and was able to expand strongly. It worked closely with the US Army Air Corps and developed various standard electrical connectors. In total, American Phenolic produced almost 62 percent of all electrical connectors used in US aircraft and radios during World War II. Arthur used the capital earned to research many new innovations and develop new products. In 1956 the company name was merged into Amphenol Electronics Corporation, and on May 17, 1957 it went public on the New York Stock Exchange. A number of acquisitions followed, with which it continuously expanded its business areas. Today the Amphenol Corporation is one of the leading manufacturers of electrical, electronic and fiber optic connectors, as well as sensors and coaxial and flat ribbon cables.

How can Amphenol develop in the future?

First, I'd like to briefly sum up the business model of the Amphenol Corporation once more. With around 80,000 employees and annual revenue of about 10.5 billion US dollars, the connector expert is one of the world's largest designers, manufacturers and marketers of electrical, electronic and fiber optic connectors and interconnect systems, antennas, sensors and sensor-based products, as well as coaxial and high-speed specialty cables. Its products are divided into two segments:

1. Interconnect Products and Assemblies: This is where Amphenol generates around 96 percent of total revenue, designing, producing and selling a broad range of connectors and interconnect systems, including antennas and sensors, which are used in a wide variety of end markets.
2. Cable Products and Solutions: This segment generates the remaining 4 percent of revenue and takes care of its cable solutions and related components, which are mainly used in the broadband communications and information technology markets.

Now let's take a look at the figures for the most recently published quarter (Q3 2021 - ended September 30, 2021). Revenue for the period from July to September 2021 set a new record; at 2.8 billion US dollars, it was a whopping 21 percent above the Q3 2020 result. Amphenol also reported a new record in adjusted earnings - it earned 0.65 US dollars per share, an increase of 18 percent year over year. No wonder they also raised the dividend sharply along the way. They increased the quarterly dividend by an incredible 38 percent, from 0.145 USD to now 0.20 USD. An increase of that size naturally makes my dividend heart beat faster.

The success isn't really surprising, since Amphenol's products are in demand like never before thanks to ongoing trends such as electric mobility, 5G, clean energy, cloud computing, artificial intelligence and many other themes. If you look at the geographic breakdown of revenue (Annual Report 2020 - page 2), you quickly notice that Amphenol now generates the majority (41 percent) in the Asian industrialized countries, followed by North America with 33 percent, Europe with 18 percent and about 3 percent in the rest of the world. I also find the industry breakdown reasonably balanced. In fiscal year 2020 the industrial sector accounted for 22 percent of revenue, the IT industry contributed 21 percent and the automotive sector 17 percent, to name just the three largest industries. All in all, a pretty diversified business that isn't too dependent on individual countries and sectors.

Going forward, Amphenol will grow not only through internal innovation and new products, but also through targeted acquisitions. In the last 10 years alone, it bought more than 45 companies this way, significantly expanding its market position. I'm very optimistic that Amphenol, with its broad product range, can continue to perform well in the future and make investors happy in the long run.

What about the dividend?

For a long time in the company's history, Amphenol paid no dividend to its shareholders. In 2005 it established a regular quarterly dividend - even though until 2011 it was more of a symbolic nature. During that time it gave its investors a share of the profits of just 0.03 US dollars. In 2012 it finally introduced a more investor-friendly dividend policy with annual increases. Looking at the dividend growth rate over the last 5 years, you can enjoy a remarkable rate of 15.7 percent. Sure, the current dividend yield of 0.7 percent isn't exactly high, but the payout ratio of just 24.4 percent signals plenty of room for increases in the coming years.

Conclusion:
It was undoubtedly a long road from the plastic-insulated radio tube to today's connector group. Today the Amphenol Corporation, with its broad product range, has become indispensable to many industries, which is why I'm also very optimistic about the company's future. I recommend that long-term-oriented investors take a closer look at this stock.