Amphenol Better Over Long Term
There are several positive factors impacting Amphenol Corporation (APH) including favorable conditions prevailing in the Interconnect Products business. The company's top-line growth is benefiting from improved end-market demand, new product rollouts and market share gains.
APH is experiencing broad-based growth across all its geographical regions with strong sales from the industrial, military/aerospace, mobile consumer products and infrastructure, and IT and data communications end-markets. We continue to rate APH a Hold with a target price of $48.
We remain optimistic about Amphenol's long-term growth prospects in the mobile devices business. The company continues to expand the use of its products into fast growing sub-markets such as PDAs, laptops, and desktop computers.
APH trades at 19.2x our 2008 earnings estimate of $2.31 per share, above the industry median multiple of 16.8. We believe the company's premium P/E multiple relative to the industry is justified, based on a higher forward growth rate than its peers.
Looking ahead, APH appears well-positioned to keep gaining share through new product development as well as grow through additional acquisitions, and it should be able to drive some further operating leverage.
The company's near-term overall operating margin target remains at 20%, which we believe the company is capable of achieving, mainly through lowering costs. The company is poised for strong earnings growth amid strong end-market demand for mobile devices and increased sales in the mobile infrastructure, military/aerospace and Datacom and Information Technology markets.
Given these trends and the potential cost savings from the acquisition of Teradyne's (TER) Connection Systems, we anticipate APH will report faster earnings growth than its peers. Our target price of $48.00 per share is 20.8x our 2008 EPS estimate of $2.31.
Integration Risks for SAP Remain
SAP AG (SAP) reported in-line revenues and weaker-than-expected earnings in first quarter of 2008 due to the costs of the Business Objects [BOBJ] acquisition. The company continued its growth in Asia, the Americas and Europe. Additionally, the company proved it is still competitive with larger deals, winning BT Americas (BT) and Pacific Gas & Electric Company (PCG) during the first quarter.
However, we are now concerned about the integration risks related to the acquisition of BOBJ, and the drag this could have on management's ability to run its core business as it tries to integrate BOBJ into the SAP fold. We are also concerned with the company's change of stance on acquisitions. Thus, we continue to rate shares of SAP a Hold.
We have increased our previously estimated revenue and earnings in US Dollar and Euro terms, while fixing an average exchange rate of 1=$1.52 for 2008 and 1=$1.50 2009. We continue to expect the company to continue to grow its revenues and earnings in excess of 10% on a constant currency basis in 2008 and for 2009, and the first quarter only strengthens our beliefs. We have fixed our target price at $55.75 based on the company selling at 21.36x our 2008 EPADS estimate of $2.61 over the next six months.
