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Arrow Electronics: Not Enough For An Investment

ValueZen profile picture


  • We are cautious about Arrow Electronics.
  • We believe the market is correctly pricing the future expectation of the company.
  • The company was experiencing some top-line deceleration starting in 2019.

We are cautious about Arrow Electronics (NYSE:ARW). From a valuation standpoint, the company doesn’t offer much of an upside as it's trading in the top range of its historical EBITDA multiple. The company was experiencing some top-line deceleration starting in their 2019 second quarter when they posted negative quarter-over-quarter sales growth of 0.6%. That trend started accelerating throughout the rest of 2019, not counting the divestiture of their PC and Mobility segment.

It's still too early to understand what impact COVID-19 is going to have on the short- and medium-term outlook for the global economy. First quarter results for their fiscal 2020 showed revenues declining 11% year-over-year. Arrow’s management is guiding sales to be in the range of $6.1B to $6.7B with EPS in a range between $1.38 to $1.54. That represents a very diminutive sequential improvement over first-quarter results if we take the mid-point of their sales guidance and a decline of 12.8% YoY.

Guidance by the company shows some optimism if compared to close competitor Avnet (AVT), which declined to comment on next quarter's results. Still, we believe the sector might remain depressed as economic uncertainties stand on the way.

There were uncertainties even before COVID-19 hit the markets

The big news in the sector came in October of last year when Texas Instruments (NASDAQ:TXN) announced a change in strategic direction by canceling distribution agreements with six entities. The most affected business from such a decision was Avnet, Arrow’s main competitor. TXN accounted for 10% of Avnet’s total revenue so it clearly had an impact on their operations. The distribution agreement is set to expire by the end of 2020

The decision of TXN to cancel its distribution agreements was so they could build a more direct relationship with their end customers and reduce operating costs. It also signals

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My goal is for you to get a quick idea of what the stock is worth. I like for you to see me as the extended version of a ValueLine Tear Sheet. I go deeply into the financial statements in search for value. Sometimes I find it, sometimes not. But knowledge is cumulative in this business which is why I enjoy reading about companies. Lets work together. I am hoping that by reaching a wide audience I could learn from great investors. I am not here to convince you about my ideas. As always do your own due diligence.

Analyst’s Disclosure: I/we 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.

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Comments (2)

I am from this industry. TXN cut off Arrow because they can -- they have the breadth of product and the sales force to do it. Not many other semi companies have this, so they will still need Arrow. For example, ADI loves Arrow and is still a strong partner. Also, Arrow's been good at new initiatives to keep being seen as valuable -- for example, when a company wants to field an internet-of-things product, Arrow has many valuable resources for them to get started -- getting started in this market is not easy or straightforward.

So ARW will continue in their low margin but successful business.
ValueZen profile picture
Thanks for your insight. I agree with your points.
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