EUR 850.00 For Business Accounts Only

Morningstar | ARW Updated Forecasts and Estimates from 04 Sep 2018

Arrow Electronics announced second-quarter results that exceeded guidance and our forecast for both revenue and earnings. Broad-based demand for components drove healthy top line growth as connectivity and electronic content remain secular tailwinds for the company. Arrow Electronics is still on track with our long-term forecast and we are maintaining our $91 fair value estimate for the narrow-moat firm. Share prices increased on the back of the financial results and are currently trading in three-star territory. We would advise investors to wait for a wider margin of safety before investing in the value-added distributor.

Revenue in the second quarter was $7.4 billion, an increase of 15% year over year and 7.5% sequentially, coming in at the high end of the firm's guidance. Global components revenue slightly exceeded expectations, increasing 18% year over year to $5.3 billion. Component demand remains strong across all regions, with both Europe and Asia Pacific sales increasing by 21% year over year and total book to bill of 1.08/1. Adjusted operating margin in the components segment ticked up 10 basis points sequentially to 4.8%, an increase of 40 basis points versus the prior-year period, despite the strong performance in lower-margin regions. We expect further expansion throughout the year as previous investments drive efficiency gains and as design wins continue with large customers.

Revenue for the enterprise computing solutions segment grew 8% year over year and sequentially to $2.1 billion with low-margin hardware products taking up a larger amount of the mix. Adjusted operating margin for the segment decreased by 20 basis points year over year to 5.2%, because of the increased mix of hardware and industry-standard servers driving sales, but margins still expanded 90 basis points sequentially. We believe margins in the segment should improve in the back half of the year as software increases in segment sales.

Gross margins declined by 20 basis points year over year to 12.6%, flat with the sequential quarter, but we expect gross margins to increase the back half of the year with more revenue generated from demand creation rather than fulfillment in components. Management's outlook for the third quarter is revenue between $7.15 billion and $7.55 billion, implying a 7% increase year over year. At the midpoint, earnings per share are expected to decline sequentially by more than 3% to $1.85.