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Summary

  • Avnet plans to continue to grow through frequent acquisitions, which has proven successful in the past.
  • Avnet's shift from the electronic component industry to value-added services should drive up margins and provide new business opportunities.
  • Low debt and high cash holdings put Avnet in a strong position for future growth.

Avnet Inc. (NYSE:AVT) is a provider of electronics related components, products, services and solutions. Its operations are divided into two groups, Electronics Marketing, which accounts for 59.3% of sales or $15.1 billion and Technology Solutions, which accounts for the remaining 40.7% of sales or $10.36 billion. These two operating groups have customers in over 80 countries. The Electronics Marketing group sells semiconductors, embedded products, which are computers that operate within a larger system, along with interconnect, passive and electromechanical devices. Electronics Marketing also offers many value-added products and services to help customers shorten the time to market of their products and eliminate costly inefficiencies. This group's customers are companies in almost every sector and range from medical equipment companies to industrial and manufacturing companies.

As its name suggests, Avnet's Technology Solutions group provides server, software, IT, systems, datacenter and cloud solutions and services primarily to technology manufacturers. Many of Technology Solutions' customers are in the original equipment manufacturing computer technology market but it also serves value-added resellers, system integrators and independent software vendors. This operating group of Avnet is known for its SolutionsPath® methodology with which Avnet provides many value-added services specifically to help companies working to expand in vertical and high-growth markets.

Over the last five years, Avnet has acquired 40 companies, which has helped it boost revenue from $16.2 billion in 2009 to $25.5 billion in 2013. One of Avnet's largest recent acquisitions was MSC Group, a European distributor of electronic components, embedded computing, and display solutions. Avnet acquired it in the second half of 2013. In 2012, MSC Group had revenue of over $450 million. Since this acquisition, Avnet has integrated MSC Group into the rest of its European, Middle Eastern and African Electronics Marketing operations and in 2014 Avnet CEO, Rick Hamada, announced that Avnet is working to market MSC Group's offerings across Avnet's entire customer base. Avnet applies this approach to many of its acquisitions and uses its large customer base, reputation, and marketing and sales resources to grow the businesses of its subsidiaries.

Avnet's acquisitions are very important to its continued success. The future of many of Avnet's core businesses is at risk due to a weakening PC and semiconductor market so it is very important that it has focused on growing its value-added services through these acquisitions. The transition from the semiconductor business to value-added services will be beneficial over the long term because Avnet's value-added services operate at a much higher margin than its semiconductor business. While Avnet has to price its semiconductor products competitively because it is an industry with limited differentiation between competing products, Avnet can charge a premium for its value-added services based on its brand reputation and the quality of its services.

In addition to growth through acquisitions, Avnet also generates growth through its strong partnerships, which are especially important for companies like Avnet, which focus on value-added solutions. In June 2014, Avnet announced that it will partner with SoftLayer, a provider of cloud computing services, including private cloud solutions, virtual servers and turnkey big data solutions. SoftLayer was acquired by IBM in July 2013, so this agreement will also help strengthen Avnet's relationship with IBM. IBM is already one of Avnet's key partners and its largest customer, with IBM regularly accounting for around 12% of Avnet's total sales.

For future growth, Avnet has turned its focus to acquisitions in Asia. In 2013, the Asian market had grown to account for 29% of Avnet's sales, up from 25% two years earlier. In May 2014, Avnet's Electronics Marketing Global President, Gerry Fay, announced plans to accelerate growth through acquisitions and expansion in Asia as long as that area continues to be profitable. Currently, the Asian electronic components market is very fragmented. Avnet hopes it can significantly grow its market share in Asia by virtue of its large scale, its ability to bring its American and European offerings to Asian customers, and by acquiring and integrating many small and medium sized competitors.

Fundamentals/Financials

Avnet has reported over $27 billion in revenue for the last twelve months, over 150% above its revenue 10 years ago despite a slight decline in revenue in 2012 and 2013. This has translated to an even higher jump in earnings over the last 10 years, which have risen over 600% from 2004 to 2013 reaching $450 million and earnings for 2014 are estimated to be $4.20 per share up from $0.60 per share in 2004.

Despite Avnet's high spending on acquisitions, especially over the past five years, long-term debt has remained even at around $1.2 billion. On top of that, since 2008, Avnet's cash holdings have increased by $360 million and are now over $1 billion. Low long-term debt and high cash holdings show that Avnet is well positioned to execute its plans for future acquisitions and hopefully, it will continue to be able to experience revenue growth through acquisitions similar to what it has achieved in the past few years.

Competitive Advantage

Avnet faces direct competition from Arrow Electronics (NYSE:ARW), Future Electronics and World Peace Group. There are also many smaller, more specialized competitors for Avnet along with larger companies who have at least one operating segment that competes with some of Avnet's services. Avnet's value-added services have helped it differentiate itself from its competition but Avnet is also facing more competition in value-added industries from larger companies expanding into these industries.

Avnet is able to differentiate its offerings through its reputation, global scale, and broad range of products and services. It was incorporated over 90 years ago and during that time it developed a strong brand reputation in many of the industries in which it operates. Avnet also continues to expand its offerings, scale, and customer base through frequent acquisitions, which should help as Avnet tries to enter new markets. New and varied offerings should also help it maintain its current customers and increase its sales to these customers.

Risks

Weakness in the PC market poses a threat to demand for many of Avnet's products. Total PC shipments decreased by 10% in 2013 and are expected to fall another 6% in 2014 according to the International Data Corporation. This decline is projected to continue at least through 2017.

Avnet provides specialized services to a small potential customer base, many of whom operate in cyclical industries. This is clearly reflected in Avnet's volatile past earnings so investors should be prepared for future earnings volatility.

Increased competition in the semiconductor industry is driving down profit margins on Avnet's semiconductor products. Over the past few years, Avnet's semiconductor business has accounted for about 50% of its total revenue.

Valuation

Avnet's stock price saw some growth at the start of 2014 but after releasing earnings slightly below estimates share prices dropped back to the low to mid $40s. However, since then Avnet has had many promising developments for its business, which should have led to an increase in its already low stock price.

Currently, Avnet is trading at a P/E of 12.8 and a forward P/E of 8.8, well below its average P/E of 14 over the last five years. Both of these values are significantly below S&P 500 averages. In comparison, Avnet's rival, Arrow Electronics, has a P/E of 14.4 and a forward P/E of 9.6. In addition, analysts expect earnings growth above 10% for the next five years and it is currently trading at a price-to-sales ratio under 0.23, about 25% below the industry average. Avnet began paying a dividend of $0.15 per share in September 2013 adding some value to shareholders. Avnet does not have a strong dividend history but as of now there are no signs that it will stop paying this dividend as long as its earnings remain strong.

Concerns about Avnet's slowing revenues especially in the semiconductor and PC industries are valid but its growing value-added businesses fueled by acquisitions should offset the slowing revenue and increased margins suggesting Avnet is significantly undervalued at its current price.

Source: Avnet's Growth Through Acquisitions Provides Good Value To Investors