The Right Stuff
Posted by Eddy Elfenbein on July 28th, 2008 at 10:19 am

IBD profiles Amphenol (APH):

Ah, the joys of a well-executed roll-up strategy in a growing but fragmented market.
That has been the winning formula for Amphenol, (APH) a maker of connectors for electronic and fiber-optic systems that has combined internal growth with growth through acquisition to triple sales since 2002.
A skilled hand at boosting margins at acquired firms, Amphenol has grown earnings even more swiftly. The firm recently raised earnings estimates for this year to $2.34-$2.38 a share. That’s over five times the 46 cents it earned in 2002.
Amphenol’s connectors, which allow the mating of different elements within a broad range of electronic products, have been in demand. With strong sales to military, commercial aerospace and mobile device customers leading the way, Amphenol posted record sales and profits in the June quarter, exceeding analysts’ guidance.
Along with raising earnings guidance, the company also hiked revenue guidance for all of 2008, predicting sales of about $3 billion, a better than 15% gain vs. ’07. With robust cash flow and almost $200 million of cash and short-term investments on the balance sheet, Amphenol is well-positioned for further performance-boosting buyouts.
“They are the consolidators in an extremely fragmented marketplace,” said Amit Daryanani, equity analyst with RBC Capital Markets. The 10 largest connector firms — including Amphenol and its two biggest rivals, Tyco Electronics (TEL) and Molex (MOLX) — hold 55% of the global market. More than 2,000 smaller companies share the remaining 45%, Longbow Research analyst Shawn Harrison says.
Amphenol typically acquires firms with niche products and then broadens sales through its vast global distribution network, Harrison says.
Amphenol has a history of identifying good acquisition targets running 10% operating margins and then bringing those margins up to the stellar corporatewide standard, now approaching 20%, according to Daryanani.
In 2005, Amphenol purchased Teradyne’s connector business, then running at mid-single-digit margins. By mid-2007, the business was running at 19% operating margins. Among the efficiencies Amphenol brings to new buys: savings in volume procurement, efficient inventory management and “good management controls,” according to Daryanani.
Amphenol acquisitions contributed 4% to the company’s 2007 revenue growth. But other things also have been going well for the connector kingpin, whose products form the seams in items ranging from cell phones and computers to complex military electronics.
Organic growth in existing businesses contributed 8.5% to last year’s overall growth, with favorable currency movement kicking in an additional 2.7%, Daryanani said.
In the second quarter, sales to military, commercial aviation and mobile-device customers all grew smartly. With wars in Afghanistan and Iraq and strength in commercial aviation sales, combined military and commercial aerospace sales grew by 24% year over year. That represents one-fifth of Amphenol’s revenue, Chief Executive Officer Martin Loeffler said during a July 17 earnings call.
The company did not respond to requests for interviews with top executives.
Growing still faster, but from a smaller base, were products used in mobile devices, up 50% year over year and now representing 11% of total revenue. Interconnect offerings for wireless infrastructure including cellular base stations also did well, tacking on 36% growth and now representing 13% of total sales, Loeffler reported.
Amphenol benefited from the buildout of a cellular infrastructure in India, Citigroup analyst Jim Suva says. (Citi has provided investment banking services for Amphenol.)
“They’re in the right end markets,” Harrison said.
Amphenol also has won share in those markets. Harrison cites mobile handsets, cellular infrastructure, defense and automotive as connector customer sectors where Amphenol has amassed share.
But there is risk in some of these sectors. Mobile handset sales, for example, are expected to be down significantly in 2008, Harrison says. A Barack Obama presidential victory that brings expedited withdrawal from Iraq could pinch the military business. Sales to commercial aviation customers like Boeing and Airbus could suffer, too, if the airlines, hit with altitudinous fuel costs, delay delivery of ordered planes.
Amphenol President and Chief Operating Officer Adam Norwitt told analysts that even in the event of a change in war strategy, Amphenol’s military business would continue to flourish. He said engagement in two wars has slowed several other defense programs, including the Joint Strike fighter, and these programs could pick up, providing new sources of revenue if war operations are cut back.
“We do see strength and the potential for demand into these larger programs that have been delayed,” said Norwitt, who will become chief executive officer in early 2009.
Citi’s Suva believes Amphenol actually could see some benefit from an early withdrawal, as much military equipment there, in use longer than expected, will need to be refurbished.
One potential kicker to earnings could be commercial deployment of the Boeing 787 Dreamliner, now expected to begin in the second half of next year.
Analysts have not yet included revenue from Amphenol’s contribution to these planes, Citi’s Suva says. He believes Amphenol could realize an additional $12.5 million in 2009 revenue, translating into 2 cents a share and $30 million in 2010, adding a nickel to EPS.
Suva says Amphenol, along with Research In Motion, (RIMM) is his top pick among the 20 electronics companies he follows.
At RBC Capital, analyst Daryanani thinks Amphenol could surprise to the upside on future earnings, but that its market multiple — already dear — is unlikely to expand. Amphenol stock, around 49, is selling at more than 18 times Daryanani’s 2009 estimate of 2.70. “You are paying a premium for Amphenol,” Daryanani said.

A Small Baseball Interlude
Posted by Eddy Elfenbein on July 28th, 2008 at 10:11 am

I hate to break this to East Coast sportswriters, but neither the Yankees nor Red Sox are in first place. You’d never know it but the no-name Tampa Bay Rays are in first, and the Angels are probably better than the Rays.
Yesterday was Alex Rodriguez’s 33rd birthday. He now has 539 home runs, which is 12th on the all-time list (for the record, I count Hank Aaron’s 755 as the record). When Hank Aaron turned 33 after the 1966 season he had a total of 442 home runs, so A-Rod is 97 ahead of Hammerin Hank. Of course, Aaron still pounded out 313 home runs over the next 10 years so A-Rod has his work cut out for him—he’s still only about 71% of the way there.
Here’s the list:
1. Aaron 755
2. Ruth 714
3. Mays 660
4. Sosa 609
5. Griffey 607
6. Robinson 586
7. McGwire 583
8. Killebrew 573
9. Palmeiro 569
10. Reggie 563
11. Schmidt 548
12. A-Rod 539
Finally, my poor Nats were shut out for the third time in the last four games, and the fifteenth time this season. Ugh!

Moog’s Earnings
Posted by Eddy Elfenbein on July 25th, 2008 at 10:42 am

Moog (MOG-A) is one of the quieter stocks on our Buy List. They make flight control systems for commercial and military aircraft. Interestingly, employees own about 60% of the stock. The company just released a solid earnings report for their fiscal third quarter. Moog earned 72 cents a share, which is a healthy increase over the 59 cents from last year. The Street was looking for 69 cents a share. Moog also increased its guidance for this year by four cents a share to $2.75 a share. For 2009, they’re expecting EPS to range from $3.08 to $3.20 a share. It’s a good stock going for a good price.
Here are Moog’s sales and earnings results for the past few years:
Year………Sales……….EPS
1998…….$536.61…….$0.67
1999…….$630.03…….$0.80
2000…….$644.01…….$0.84
2001…….$704.38…….$0.94
2002…….$718.96…….$1.11
2003…….$755.49…….$1.22
2004…….$938.85…….$1.45
2005…….$1,051.34….$1.64
2006…….$1,306.49….$1.97
2007…….$1,558.10….$2.34

Words of Wisdom
Posted by Eddy Elfenbein on July 25th, 2008 at 10:29 am

Amen.

Americans should be outraged at the latest sweetheart deal in Washington. Congress will put U.S. taxpayers on the hook for potentially hundreds of billions of dollars to bail out Fannie Mae and Freddie Mac. It’s a tribute to what these two institutions — which most Americans have never heard of — have bought with more than $170-million worth of lobbyists in the past decade.
With combined obligations of roughly $5-trillion, the rapid failure of Fannie and Freddie would be a threat to mortgage markets and financial markets as a whole. Because of that threat, I support taking the unfortunate but necessary steps needed to keep the financial troubles at these two companies from further squeezing American families. But let us not forget that the threat that Fannie Mae and Freddie Mac pose to financial markets is a tribute to crony capitalism that reflects the power of the Washington establishment.
Fannie and Freddie buy home loans from lending institutions and reissue them as marketable securities — creating a liquid market for mortgage debt that lowers borrowing costs for prospective homeowners. The two institutions have easy access to borrow at low interest rates because they were originally government agencies and continue to be viewed as being backed by the government. The irony is that by bailing them out, Congress is about to make that perception a reality, even though government backing is no longer needed for their original mission. There are lots of banks, savings and loans, and other financial institutions that can do this job.

Ave Maria
Posted by Eddy Elfenbein on July 23rd, 2008 at 8:37 pm

From two years ago, here’s Maria Bartiromo bombing on Celebrity Jeopardy:


What’s more embarrassing than losing on Jeopardy? Losing to Gloria Vanderbilt’s son.
(Via a new CWS favorite: CNBC Sucks)

The Stock Market and Whole Numbers
Posted by Eddy Elfenbein on July 23rd, 2008 at 3:43 pm

Yesterday, the S&P 500 closed at 1277.00, and at 1262.00 on the day before. The market hasn’t had back-to-back whole number closing since August 7&10, 1987, just before the market crash.

Harley Adds a Third Wheel
Posted by Eddy Elfenbein on July 23rd, 2008 at 1:01 pm

Meet the Tri-Glide Ultra from Harley-Davidson’s 2009 collection.

The Yahoo Mess
Posted by Eddy Elfenbein on July 23rd, 2008 at 12:58 pm

I have to confess that I can’t make any sense of Yahoo (YHOO) and its share price. I’ve said for some time that the stock should be around $15. Frankly, I consider that to be an optimistic price. Still, Microsoft thought it was wise to offer $33 for the company, and Yahoo thought it was wiser still, to reject that offer. And then later accept it after it had been withdrawn.
Yesterday, Yahoo reported that its quarterly earnings-per-share fell from 11 cents last year to nine cents this year, two cents below the Street. This was the ninth time in the past ten quarters that YHOO’s earnings have decline. Sales rose just 5.9% to $1.8 billion. I just don’t get it. How can a company with such mediocre performance command such a high share price?
This company has gone from earnings 58 cents a share in 2005, to 52 cents, to 47 cents, and probably another 47 cents this year. Yet, YHOO is over $21 a share. Nicholas Financial (NICK), on the other hand, went from $1.13 to 94 cents, and it’s under $5 a share.

Bush: “Wall Street Got Drunk”
Posted by Eddy Elfenbein on July 23rd, 2008 at 8:51 am

President Bush was recorded as saying, “There’s no question about it. Wall Street got drunk, that’s one of the reasons I asked you to turn off the TV cameras. It got drunk and now it’s got a hangover. The question is how long will it sober up and not try to do all these fancy financial instruments.”
Presumably, this is an area that Bush is familiar with. Let’s continue the metaphor and say that the Federal Reserve “was doing lines of blow off the hooker’s ass.”

Flip a Coin, Get a Job
Posted by Eddy Elfenbein on July 22nd, 2008 at 10:27 pm

Guest blogging at Paul Kedrosky’s crib, Joseph Weisenthal spots this ad from a hedgie joint on San Francisco’s Craig’s List. The final requirements are:

1) Prepare a cover letter.
2) Flip a coin 50 times. Record the results on your resume as a sequence of heads (H) or tails (T) symbols.
3) Email your cover letter and resume to us.

So what’s the deal with the 50 coin tosses? Joe thinks it could be a way to spot phonies, since the data set is hard than it looks to fake. If you were to fake it, would you have the courage to list head or tails on a row? I wouldn’t, but the odds of that aren’t unreasonably small.
Then again, 50 tosses ain’t that much. Plus, it could be done easily with the random number generator on Excel.
Some commentors think it’s a sardonic comment on the nature of investing. Could be. Although that probably doesn’t explain why they’re hiring.
My guess is that it’s a trick question. Once in the interview, they’ll ask you what kind of coin you used. Any who still deals in U.S. currency will automatically be eliminated from consideration.