The electronic component industry is one which is expanding manifold all around the globe, especially in the Asian region. According to the Global Industry Analysts (GIA):
The global market for electronic components is expected to maintain its growth at a steady rate over the upcoming year mainly driven by elements such as demand increase for consumer electronic goods, mainly mobile communication devices, and growing penetration of electronic systems in automobiles. Robust demand from developing markets, especially Asia-Pacific, also predicts well for the future of this market. Thus GIA projects that the global market for electronic components would reach up to $183.9b by FY15.
Innovation hubs are no longer centered only in the US, the European Union and Japan; Asia is quickly catching up with the swift speed of economic developments in China and India. Now the global innovation hubs have a new hierarchy:
- Centers of Excellence in Innovation: USA, European Union and Japan
- Advanced Countries: e.g. Taiwan, Korea, Ireland and Israel
- Newly Advancing Regions: e.g. Beijing, the Yangtze River delta, and the Pearl River delta in China; Bangalore, Chennai, Hyderabad and Delhi in India
- New Frontiers: e.g. lower-tier cities in China and India, also Romania, Vietnam, Bulgaria and Armenia (Source: A new geography of knowledge in the Electronics Industry; Dieter Ernst)
That is why the companies which have focused on these "newly advancing" or "new frontier" groups will surely grow in the near future.
Source: Yahoo Finance
The chart above shows the stock performance of some of the major players in the electronics distribution industry. It can be seen that the stock of Avnet Inc. (NYSE:AVT) grew by just 10% over the last year, compared to the 18% and 37% growth of Arrow Electronics Inc. (NYSE:ARW) and Anixter International Inc. (NYSE:AXE), respectively. Now, on the surface, AVT stock is not performing very well compared to the other players, but in the long run it is all set to leave everyone behind, and the major reason for it is its growing sales in the Asia-Pacific market.
Business Description of AVT
Avnet Inc. is one of the world's largest distributors of electronic components, enterprise computers, storage products and embedded subsystems on the basis of sales. Its operations are divided into two segments: electronics marketing (EM) and technology solutions (TS). Both these segments have operations in three of the major economic regions of the world: the Americas, Europe/the Middle East/Africa (EMEA), and Asia. As mentioned above, AVT is focusing heavily on the developing Asia market, which has bright growth prospects in the long run.
Source: Company Financials
According to its current quarter financials, as shown in the chart above, it can be seen that a greater proportion of its revenue is generated by electronic marketing. This segment is of major importance for AVT right now, as it is the key to penetrate the Asian markets.
Source: Company Financials
The graph above indicates that the largest share of revenue for the company's electronic components division is generated from the Asian region. As far as the technology solutions division is concerned, the Asian region is still undergoing the development phase, hence has lower technological solutions requirements.
Source: Company Financials
This strategy of AVT to aggressively penetrate the Asian market differentiates it from its competitors, as ARW and AXE do not have operations in Asia as big as AVT.
The company has had decent growth over the years, and is expected to follow the same patterns in FY13. The reason for growth in the revenues of FY13 is the fact that Asia is a growing market and the demand from that particular region will continue to increase for some time. According to Phil Gallagher, Global President of Avnet Technology Solutions, "Asia is the growth engine driving tremendous profits for Avnet Technology Solutions." For the past four years Phil saw Asia-Pacific business grow from just 3% of the company's overall revenue globally to 15%-17% of the overall revenue just from the Asia-Pacific region in his fourth year, which is by all means an extraordinary growth. This phenomenal progress in the Asian market has not been achieved by any of the competitors of AVT, which is a big plus for the company.
The table above gives a comparative DuPont analysis of AVT with its major competitors ARW and AXE. It is evident that AVT has a greater asset turnover and a lesser financial leverage, and as a result offers a greater return on equity, thus outperforming both ARW and AXE.
The table above indicates that AVT is currently performing quite well compared to its direct competitors and the industry. On the basis of price-to-earnings, AVT is highly undervalued, and due to the positive future outlook it is projected to increase. It is also undervalued on the basis of price-to-book and price-to-sales multiples, signifying that the company has optimistic potential.
The increase in the development of Asian countries has opened the gates to a lot of opportunities for American industries. The increase in demand for electronic components and technical solutions in Asia is a major focus area for many electronic component companies, and AVT is one firm that has taken a full lunge into this market. A major proportion of the company's revenue is being generated from the Asian market, and due to its consistent growth, the company has an exceptional growth potential in the long run. On the basis of the above analysis, I would recommend a buy stance for all investors who are looking for higher returns in the long run.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.