In a year of red across much of the global stock market, you can find some green in mid-cap value stocks. The Invesco S&P MidCap 400 Pure Value ETF has returned 3% in 2022, outpacing the S&P 500 by nearly 20 percentage points. One of its constituents is up even more, and it’s within a space that has been under even more pressure than the SPX. Is there more relative strength to come in shares of Avnet?
According to Bank of America Global Research, Avnet (NASDAQ:AVT) is a global distributor of electronic components (semiconductors, passives, connectors, etc.). The company ships over 117 billion electronic components annually (from 1,400+ suppliers) to upwards of 2 million customers. Customers include OEMs, and EMS/ODM companies, among others. Avnet has two operating segments - Electronics Marketing (EM) and Premier Farnell (PF).
The Arizona-based $4.1 billion market cap Electronic Equipment, Instruments & Components industry company within the Information Technology sector trades at a low 5.8 trailing 12-month GAAP price-to-earnings ratio and pays an above-market 2.6% dividend yield, according to The Wall Street Journal. Avnet recently beat on both the top and bottom lines in its Q3 report and the firm declared a $0.29 dividend. Before that key news, Goldman Sachs ranked Avnet as one the cheapest stocks even if there is a massive 30% cut to earnings within Russell 1000 cyclical stocks.
Still, we must be realistic about pressures on margins for this chip stock. A weaker macro landscape will no doubt be challenging, but there is some upside from its restructuring that is ongoing. Back in September, the firm announced that Ken Jacobson would be the new CFO.
Other downside risks stem from the disengagement of Texas Instruments and Maxim and higher costs due to Covid. Upside potential comes from a shallower real GDP dip around the world, a broader pickup in the Internet of Things, and synergies with revenue around Premier Farnell. Also, the company could buy back shares at cheaper prices.
On valuation, analysts at BofA see earnings flat-lining near $7 per share now through 2024. The Bloomberg consensus forecast is less sanguine than BofA’s take. Dividends, meanwhile, are expected to increase just slightly in the years ahead after a hike a few months ago.
Still, with earnings steady over the coming quarters, both the operating and GAAP P/Es look good, and its EV/EBITDA multiple is less than one-half that of the broad market. Free cash flow is expected to be quite strong next year and beyond.
Overall, growth is soft for now, but a lot of pessimism is baked in. I like the valuation metrics here.
Looking ahead, corporate event data from Wall Street Horizon show a key speaking engagement this week as AVT’s management team is scheduled to present at the Wells Fargo 6th Annual TMT Summit 2022. After that volatility catalyst, the stock trades ex-div on Tuesday, December 6. The next earnings date is unconfirmed to take place on Wednesday, January 25 AMC.
AVT exhibits impressive relative strength this year. Shares are up 12% in 2022 versus a significant loss for the broad market and tech sector, specifically. The stock’s chart is still messy though – we could see some near-term profit-taking at the current level if the downtrend resistance line off the June high proves problematic.
Also, the stock paused right where it met some selling pressure back in late August. Still, there should be ample support if the stock indeed pulls back – the rising 200-day moving average will soon be near its November low. Overall, the chart is not telling me too much here, so I would focus on the valuation.
I like AVT’s valuation right now, and Goldman’s assessment of how cheap the stock still is even after an assumed earnings cut is reason for hope for this high relative strength stock to continue higher.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.