EUR 850.00 For Business Accounts Only

Morningstar | Arrow Slightly Off-Target as Margins Offset Revenue Growth; Maintaining $91

Narrow-moat distributor Arrow Electronics announced mixed first-quarter financial results. Revenue was near the high-end of management’s prior guidance, and above our estimates, but the mix reflected a weaker demand environment in Europe and the Americas where the firm sells more of its high-margin component products. As a result, profitability was curbed as adjusted earnings just met the low-end of prior guidance. Product and regional mix, profitability, and working capital paint a mixed near-term picture but we believe conditions are likely to improve near the end of the year. We will maintain our $91 fair value estimate. Shares have returned to 4-star territory after the results and we believe there is a healthy margin of safety at current prices.

Total revenue in the first quarter was $7.16 billion which represented a 10% decline sequentially and 4% growth year over year. Sale of components exceeded the high end of management’s guidance with $5.2 billion in the quarter amid strong demand in Asia, albeit for lower-margin products. In the Americas region, Arrow noted strong growth from data processing and medical devices but demand in general was for commodity-like products. Europe was particularly weak growing just 2% year over year and 7% sequentially and demonstrated the same soft demand for more highly engineered products. As a result, operating margins for components contracted 20 basis points year over year to 4.5%. Management described a tricky near-term environment, with slowing design activity and a book to bill below parity in Europe. Still, while book to bill has come down from the 1.22 in the first quarter of 2018, it remains at parity and above the 0.95 in the preceding quarter. Enterprise computing solutions, however, was solidly in line with guidance with growth of roughly 1% and 2% year over year in Americas and Europe, respectively. Margins here too were negatively impacted by the increased mix of hardware rather than software.

Management’s outlook for the upcoming quarter suggests another weak period for profitability as the firm continues to negotiate an uncertain demand environment. Revenue guidance, however, is greater than we expected with sales growing by 4.5% year over year to $7.73 billion at the midpoint on account of strong demand in Asia offsetting softness in developed markets. Management believes these conditions should work themselves out over the next few quarters, but the mix outlook suggests weaker profitability between now and then, as demonstrated by Arrow expecting adjusted EPS to decline by nearly 9% year over year in the second quarter to $2.00 at the midpoint.