We have lowered our long-term recommendation on
) to Underperform from Neutral following the company's
disappointing results in the fourth quarter of fiscal 2012.
Moreover, with the prevailing macro economic uncertainty, Avnet
may face more headwinds going forward.
During the fourth quarter of fiscal 2012, the company's
earnings declined 18.9% annually and missed the estimates by 9
cents. Management stated that lower sales and adverse impact from
foreign currency translation had adversely impacted the company's
business during the quarter.
Asia undoubtedly remains one of the largest growth drivers for
the company. However, it must be noted that while this region is
profitable, it also contributes largely to the lower margins of
Avnet. The company has been taking extensive measures to increase
operations in its Asian markets in order to avail of lower costs,
but this attempt might also prevent the company from achieving
higher margins. The Technology Solutions is expected to be hit
the most in this regard, which is evident from management's
current three-year operating margin projections of 3.4%-3.9% for
Avnet's domestic and foreign operations are subject to
significant competitive pressures. It faces stiff competition
Arrow Electronics Inc.
(ARW), which remains a fiercely formidable rival. Arrow's recent
acquisitions of ALTIMATE Group, Global Link Technology and
Redemtech can turn out to be highly profitable, thereby posing a
serious threat to the future of Avnet.
Further, Avnet is a global company with operations in around
70 countries. Approximately 61% of total revenue came from
international operations in 2012. Although this is highly
laudatory, it does make the firm vulnerable to foreign currency
Additionally, the company earns a huge portion of revenue from
the semiconductor industry, which is highly cyclical in nature.
Hence, we believe, any fluctuation in this industry would surely
affect the company's business going forward.
However, we have identified few prospective silver-linings
under the strong downbeats, which might neutralize these
negatives. These positives include the company's strong product
line and share buy-back initiatives, which provide Avnet with a
high competitive edge in this industry, thereby improving its
credibility ratings even more.
The company's steady acquisitions are expected to be a good
contributor to its revenue stream going forward. Avnet has been
assiduously expanding its market share, especially in Europe, the
Middle East and Asia through its acquisition strategy. During
fiscal 2012, the company completed acquisitions of eleven
businesses with total annualized revenues of $900 million.
Moreover, the company has taken several effective cost-saving
initiatives through its restructuring actions. This strategy is
expected to encourage the company's margins moving ahead.
Even though a few upsides prevail owing to the tremendously
precarious conditions clouding the company's growth lines, we
lowered our recommendation on Avnet to Underperform from Neutral.
Our recommendation on the stock is backed by a Zacks #5 Rank,
which translates into a short-term (1 to 3 months) 'Strong Sell'
ARROW ELECTRONI (ARW): Free Stock Analysis
AVNET (AVT): Free Stock Analysis Report
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