There's no shortage of high-growth tech companies out there to choose from. As a new bull market eventually gets rolling, driven by hot new semiconductor technology in support of artificial intelligence (AI), many investors are flocking to chip manufacturers and chip manufacturing equipment stocks (like Taiwan Semiconductor Manufacturing or ASML Holding, for example).
But high growth doesn't always mean better stock returns. On the contrary, "boring" companies that balance growth with shareholder returns (dividends and stock repurchases) tout some epic market-beating performances.
Enter basic tech component manufacturer Amphenol(NYSE: APH). Going back to the date in the late 1990s when we can compare it with the SPDR S&P 500 ETF and Invesco QQQ Trust (which measures the top 100 companies in the Nasdaq Composite index), Amphenol stock has absolutely crushed the market. It's up nearly 10,000% when accounting for reinvested dividends!
Data by YCharts.
How could such a manufacturing powerhouse go largely unnoticed? And is Amphenol stock a buy for 2024? Here's what you need to know.
Commoditized manufacturing can be incredibly lucrative
Few investors know about Amphenol, a top tech component manufacturer (its market cap is nearly $60 billion as of this writing) that makes everything from raw cable (audio/video coaxial cable, for example) to cable connectors and assemblies, basic sensors and antenna arrays to circuit boards (what chips are mounted on).
Sound boring? Good. Amphenol bears some similar financial traits to analog chip and embedded computer giant Texas Instruments (NASDAQ: TXN), which has doled out low-teens free cash flow-per-share growth for many years (at least up until recently, as TI now needs to spend heavily on constructing new chip fabs).
But to draw the comparison simply, rather than focusing on bleeding edge tech manufacturing, Amphenol (and TI) focus on very cheap "commoditized" parts that are easy to replace with those from a competitor. However, their competitive advantage is in large-scale manufacturing operational excellence that allows them to turn a healthy profit even on these basic parts and pieces of an electronic system. Some components cost mere pennies each when bought in bulk. And customers often turn to a supplier like Amphenol thanks to its ability to quickly meet their needs and demands, regardless of current economic conditions (like, for example, during the chip shortage of late 2020 through 2021).
Amphenol changed institutional investor hands many times over the decades but emerged largely in its current form in the early 1990s. In the late 1990s, global investment firm KKR took a stake in Amphenol and set in on a path that has continued today: one favoring modest organic growth, supplemented by strategic acquisition of smaller manufacturing peers it can stoke more profit from.
There's nothing overly glamorous about the strategy, but for the type of end markets the company focuses its manufacturing on, it's clearly been working. Free cash flow-per-share growth is up some 250% over the last decade alone, fueling an even more aggressive 450% rise in dividend payout.
Data by YCharts.
Is this stock a buy for 2024?
For investors looking for more "boring" market-beating investments for the coming decade, Amphenol is worth getting familiar with. Though not so sexy, connectors, sensors, and antennas will serve multiple secular growth trends -- like the digitalization of modern vehicles and the aerospace and defense markets, industrial and manufacturing automation, and data center-based AI.
There is one problem, though. The stock currently trades for 31 times trailing-12-month earnings per share, and some of its industrial markets are entering a bit of a soft patch as we head into 2024. Excess inventory of some key components paired with global economic worry has temporarily throttled some of these industrial secular growth trends -- though likely only momentarily.
Shares trade for a premium price. I thus call this stock a hold-and-monitor for now, but keep an eye out for pullbacks on temporary growth slowdowns the first half of 2024. Buying shares of a company like Amphenol in batches (perhaps using a dollar-cost averaging plan) could yield outsized returns from gradual growth and dividends over the long term.
Should you invest $1,000 in Amphenol right now?
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Nicholas Rossolillo and his clients have positions in ASML. The Motley Fool has positions in and recommends ASML, KKR, Taiwan Semiconductor Manufacturing, and Texas Instruments. The Motley Fool has a disclosure policy.
