Morningstar | Arrow Remains a Moat-Worthy Distributor
Arrow Electronics is one of the world’s largest value-added distributors of electronic components, including semiconductors, capacitors, and interconnect products; it also provides enterprise computing solutions. We believe the demand for increased electronic content and the firm’s ability to offer end-to-end solutions will enable Arrow to generate returns over its cost of capital for the next decade. We think Arrow warrants a narrow moat rating, as competitors and suppliers will be unable to erode its significant cost advantage, which we expect the firm to maintain with ongoing investment in its sales and engineering capabilities. We believe Arrow has invested wisely in addressing the needs of small and midsize enterprise customers who can benefit from its value-added services, such as supply-chain and design-chain services, as well as component testing. This type of customer typically cannot make the costly ongoing investments in engineering knowledge required to address the full suite of component products available. Instead, such customers often look to a value-added distributor, such as Arrow and competitor Avnet, to provide these services in addition to fulfillment. Suppliers use these distributors to access a broader customer base without having to build out dedicated sales and engineering teams to advise on component integration. Arrow’s acquisition strategy has been to maintain its moat by enhancing its value-added service offerings (for example, by recently purchasing component design company eInfochips) and by expanding its digital presence to capture more customers. Arrow has also been very aggressive about securing a place in the IT solutions market, an area management deems essential to benefiting from Internet of Things, or IoT, growth. The firm has captured greater market share due to its ongoing investment. We believe Arrow is executing its strategy well in this segment, maintaining respectable growth rates amid broader industry declines and doing so with decent margins. We believe it could leverage its component knowledge and unique understanding of businesses’ IT demands to further solidify itself as a value-added distributor.Arrow Electronics is a provider of products, services, and solutions to industrial and commercial users of electronic components and enterprise computing solutions. The company has two business segments, the global components business and the global enterprise computing solutions (ECS) business. The global components segment markets and distributes electronic components and provides customers with the ability to deliver technologies to the market through design engineering, global marketing and integration, global logistics, and supply chain management. The global ECS segment provides computing solutions and services, including data-center, cloud, security, and analytics solutions.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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