We recently upgraded our recommendation on
Arrow Electronics Inc.
) from Underperform to Neutral based on the company's best in class
services, improved design and easy-to-acquire technologies.
We are optimistic that Arrow's newly introduced product ranges
including ArrowSphere, UC in the Cloud solutions and Live Virtual
Help Desk services are likely to mitigate the increasing demand in
the industry. Moreover, the company's broad portfolio of products
and services is expected to elevate its position and enable it to
secure substantial market share in the present scenario.
Arrow, being a key player in the low-margin Electronic
components and computer products distribution business, has a keen
eye for profitable acquisitions, which
are likely to enable Arrow to enter new markets and maintain its
leading position in the global market. During the first six months
of 2012, the company completed five acquisitions, which are
expected to boost sales in the coming quarters
Repurchase of common stock utilizing its strong cash flow
position has been an ongoing trend at Arrow. As of June 30,
2012, a total of 4,035,802 shares were bought back by Arrow for
$149.7 million. In June 2012, the company announced buyback of an
additional $200 million of its common stock under a share
repurchase program. This buyback of common shares, we believe, will
certainly boost investor confidence. In addition, the company's
balance sheet remains sound, which enables it to safeguard against
any slowdown in the economy.
Moreover, Arrow's cost effective strategy has helped it to
establish itself at an advantageous position in the industry. The
company has recently taken an initiative to trim down its costs by
$20 million, which reflect its ongoing efforts to improve its
operational efficacy and enhance margins going forward.
On the flipside, the current macroeconomic challenges coupled
with slower growth in China has been impacting the company's
financials and dampening sales. In addition, various other factors
such as foreign currency fluctuations and external operational
hazards including change in political or economic conditions have
also been affecting the company's business, thus raising
Arrow's significant portion of revenues come from the sale of
semiconductors, which is a cyclical industry characterized by
changes in technology and manufacturing capacity, and is also
subject to significant market fluctuations. The current slowdown is
expected to adversely affect the company's semiconductor business
thereby hurting its revenue stream. Meanwhile, Arrow's computing
segment continues to be impacted by overall business spending cuts
and the corresponding pressure on prices and profitability is
expected to negatively impact the company's overall top line growth
The company's domestic and foreign operations are subject to
significant competitive pressures. Competition looms large from
major players in the industry, which include
Richardson Electronics Ltd.
). To compete successfully, Arrow must excel in terms of product
quality and innovation, customer service, technical and computing
capabilities and price competitiveness.
Arrow holds a Zacks #3 Rank, which translates into a short-term
(1-3 months) 'Hold' rating.
ARROW ELECTRONI (ARW): Free Stock Analysis
AVNET (AVT): Free Stock Analysis Report
RICHARDSON ELEC (RELL): Free Stock Analysis
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