Markets in electronics are never quiet, as they are either seeing a convergence and/or a transition toward a new promising technology that becomes mainstream. The $40 billion global connector industry is no exception, as it is forced to move at a fast pace along with its clients. Today, more and more electronic devices are required to send and receive data, which is pushing high-margin products like antennas and components to improve the telecommunication infrastructure. However, since the core of this business necessary leads to commoditization, the question here is how the three largest connector suppliers deal with price erosion and remain competitive.
Amphenol: Record sales
First, we have the second largest and most diversified company in the dynamic interconnect industry, Amphenol (APH 1.61%).
The company posted good results for its Q3 2013, reaching record sales of $1.153 billion. The main drivers were organic and acquisition-related growth in all segments with the exception of the mobile device market. Improved end-market demand is boosting the company's sales, which is a good sign in the current economic environment.
A key aspect about Amphenol is its end-market diversification, which enables it to surf macroeconomic uncertainty better than its peers, positioning itself in new markets and getting new customers. This is one of the reasons behind the significant inorganic growth that Amphenol has witnessed over the years. In fact, the company has outperformed the industry for the last 10 years and has achieved a 15% compound average growth rate.
Molex: Acquisition driving attention
Another company to analyze is Molex (NASDAQ: MOLX), which is positioned as the leading supplier of connectors into the tablet segment and netbook markets.
The company recently posted its Q1 results, showing a 2.1% year-over-year increase in net revenue, which reached $936.4 million, and an above-guidance EPS of $0.46. Automotive, telecom, and mobile devices markets were very strong during the quarter.
But, the biggest news for the company came In September this year, when Molex agreed to be acquired by Koch Industries for $38.5 per share in cash and a total equity value of approximately $7.2 billion. This operations made Molex a stand-alone subsidiary of Koch Industries, retaining its current management and headquarters. The merger is still pending, but will make the company even stronger.
However, there is growing mid-term problem for the company that it will, sooner than later, affect its profitability. The segments that experience more growth are lower-margin segments, which makes Molex's products more commoditized. The company intends to get into the mobile market in a big way, but that's not happening quickly. We will have to find out if the merger speeds up this transition.
TE Connectivity: Margins up
The last company to consider is TE Connectivity (TEL +0.00%). Formerly known as Tyco Electronics, it is the largest connector company and holds a significant presence in almost every major market.
Fourth-quarter results were in line with expectations, showing a 2% YOY revenue increase to $3.4 billion. One big driver was its transportation segment, which grew 9% compared to the same quarter last year. The network and consumer segments remain weak although management cited a moderate improvement in demand in the network business.
But the great news for TE Connectivity came from its gross margin expansion, which increased to 33.7% reaching its highest since the company's spun out from Tyco in 2007. It is important to remember that this company experiences an annual average selling price decline of 1%-2%, with rising costs of raw materials. So its margin-expansion proves us that the company's cost-saving initiatives and scale improvements are making progress.
Bottom line
Amphenol is well-positioned to surf macroeconomic headwinds due to its diversified production and clientele. It is a promising stock to hold for the long run.
Molex's acquisition is a great sign, and the company's position could improve a great deal as a result. However, the company will require some time to be able to realign and execute its strategy. Keep a close eye on its segment performance.
TE Connectivity's increased mid-term margin projections are something that should make the company outperform its peers. If costs do not increase and sales remain in line with expectations, the company could post good performance in the future.
