3 Ways to 'Connect' With a Growing Market

 | Jul 20, 2016 | 4:32 PM EDT
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Diverse connectivity franchises, such as Belden (BDC) , Amphenol (APH) and TE Connectivity (TEL) , reported solid results this week, demonstrating these business models are relatively resilient to underlying weakness in the economy. These companies touch wide swaths of the global economy, measuring and sensing anything with a signal in our automobiles, trucks, industrial, military and environmental processes, and communications apparatus.

It is no surprise that well-capitalized companies, like SoftBank Group (SFTBY)  with its recent bid for ARM Holdings (ARMH) , or Koch Industries, with its ahead-of-the-curve purchase of Molex a few years back, looked to connectivity as a secular growth area. Niches that use sensors, wiring, controls and connectors are vast -- from Internet of Things (IoT) applications to emissions monitoring -- and content in various end uses is growing rapidly. The operating leverage inherent in these business models is impressive as sales growth unfolds rapidly.

Belden reported strong second-quarter results Tuesday, handily beating consensus views on healthy sales, and raised guidance for the balance of 2016. Strong growth was seen in enterprise, security and broadcast spending, with each area showing double-digit gains in the quarter. It has been tough to find this level of growth in the market of late.

Belden is enjoying decent pricing, secular themes, and still remains a reasonably priced stock. Newly revised EPS guidance is $5.50-$5.70 for 2016 and the company could grow that to more than $6.00 next year. The stock could see $100, as a result, as multiples expand and the market broadens into more economically sensitive areas.

Powerhouse Amphenol followed suit this morning. It has been a consistent grower over the years. Earnings are stable and less cyclical than others, like Belden, and because of this reliability, the stock has earned a premium multiple.

Amphenol's management team has been adroit acquirers and integrators, always with a close eye on costs. This content and geographic expansion story remains very compelling. However, the cheapskate in me always waits for that rare missed quarter to get excited about the stock. That comes from time to time when Apple (AAPL)  adjusts the supply chain, or military customers reduce inventories. Amphenol manages this variability well. I want to wait for another one of those dips.

Finally, TE Connectivity, the Tyco spinoff from a few years ago, remains the "red headed stepchild" of the group. The company's consistency has increased substantially over the last couple of years. It has acquired well into areas, such as harsh environments, that have enabled the company to increase content in the industrial space globally. TE Connectivity had also appropriately divested pieces of the business where it had lost a competitive edge, such as mobile telephony.

TEL stock is trading at a meaningful discount to the market. The company narrowed EPS guidance to around $4.00 for this year, so earnings growth of 10% into 2017 could yield EPS of $4.50 and potentially an $80 stock. The shares are at around $62, up 4% today. This one is currently my favorite of the three.

I would be remiss if I didn't mention smaller-caps with exposure to this connectivity and sensor theme. Stoneridge (SRI) , CTS Corp. (CTS) , CalAmp (CAMP) and a distributor of all of this stuff, Anixter International (AXE) , deserve a look here as well. If anything, these smaller companies should be viewed with the same discerning eye for growth as some of the larger companies trying to get into this growing market via acquisition.

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