A recent interview excerpt from The Wall Street Transcript (TWST.com) asks Steven O'Brien, a J.P. Morgan analyst specializing in coverage of connector giants Amphenol (NYSE:APH), Molex (NASDAQ:MOLX) and TE Connectivity (NYSE:TEL) about the investment outlook for these companies and their respective performance in the diversified global electronics market.
In response, O'Brien elegantly breaks down the many industries supporting the continuing growth in global demand for electronics connectors, and explains why connectors are such vital components in the signal/power chain:
Basically, a connector connects one piece or part, and it could be the input/output portion of an electronic device, to typically the internal controls of a machine or a device. It could be carrying electronic signals, it could be carrying electrical power.
In either case, these connectors serve a vital function. Poor connections degrade signals or degrade power, resulting in lost efficiency or worse. So an ideal connector is one that has the least interference on the electronic signal or the electric power being carried through.
In terms of specific examples, [connectors] are used in everything. They are used in your mobile phones. They are used in automobiles. They are used in aircraft. They are used in military equipment. They are used in networking equipment. They are used in appliances. They are used everywhere.
I think, broadly, connectors are about a 50 billion a year industry right now. I'd say about 30% comes from communications. That includes both communications equipment like communication service providers use, as well as communication devices like smartphones and tablets. Industrial, which is a hodgepodge, it's the industrial automation equipment.
It's any kind of product used in terms of transportation, or oil and gas industry or mining, so on and so forth. It's hard to call that a market, but it's probably the next biggest user of connectors, I'd say. It's about 22% of the market.
Automotive would be a close third place, roughly around 18%. Aerospace and defense, and data networking, which includes computer servers and so and so forth, are both about 12% of the market. What you have left is probably about 5% of the market from appliances and consumer devices.
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Elsewhere in the interview, by way of explaining why exactly Amphenol, Molex and TE Connectivity are successful in their dominance of the industry, O'Brien had this to say:
The broad theme here is [that these are all] companies that benefit from growing electronics penetration across industries. Connectors are used in any product or any device that has electronic signals, and that's pretty much everything these days. In any given industry, electronic content is growing, there is no denying that trend. All these companies broadly benefit from that trend.
Another major positive that the connector industry has going for it is that unlike other areas, you have broad and almost agnostic exposure to success of the various OEMs in any given industry. So you don't see the success of Amphenol, Molex or TE tied to the success of any other company. That is in contrast with the electronic manufacturing services industry where the troubles of companies like Cisco and RIM have been disruptive for their supply chain. You don't see that in the connector industry.
Link: Analyst Interview Excerpt - Electronic-Connector Content Grows Across Industries - Steven O'Brien - J.P. Morgan (twst.com)
