Amphenol Downgraded to Neutral

We recently downgraded our recommendation to Neutral from Outperform for Amphenol Corporation (APH), which designs, manufactures and markets electronic and fiber optic connectors, interconnect systems and coaxial and high-speed specialty cable.

Amphenol’s top-line growth benefits from improved end-market demand, new product rollouts, and market share gains. 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.

Amphenol is also growing through acquisitions. The company aims at acquisitions on a global basis in the high-growth segments that have complementary capabilities from a product, customer and/or geographic standpoint. This also makes use of the strong cash balance of the company.

We remain impressed by the company’s activity on the acquisition front and integration of the same. In 2009, Amphenol invested approximately $280 million for acquisitions. A significant portion of this investment was made in the target markets, including the military aerospace, wireless infrastructure and telecommunications & data communications markets, to broaden and enhance its product range in these areas.

Amphenol reported strong results for the second quarter, but guidance for the third quarter was not impressive. Although Amphenol is encouraged by improvement in overall economic conditions, demand is still not very strong and certain. Earnings estimates have roughly been static in the last thirty days with one downward revision for 2010. For 2011 as well, there was one downward revision in the last thirty days.

We believe, much of the growth is already priced in the stock at current levels and see limited upside going forward. The fears of a double dip recession in the economy loom large and spending might not be favorable in such a scenario. Hence, we downgrade our recommendation to Neutral from Outperform.

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