EUR 850.00 For Business Accounts Only

Morningstar | Results Miss and Asset Impairment Push Arrow Off-Course; Lowering FVE to $85

On July 15, Arrow Electronics announced preliminary second-quarter results ahead of its official earnings call, lowering the revenue guidance by more than 5% from the previous midpoint and cutting adjusted earnings per share by more than 10% after macroeconomic uncertainty pushed performance off course. Management also announced plans to close the firm’s personal computer and mobility asset disposition business, resulting in $616 million in impairments and a loss in quarterly revenue of $78 million. Management indicated that the business was no longer aligned with the firm’s broader strategy. Altogether, while the results miss and impairments do not materially impact Arrow’s narrow moat, they do result in us lowering our fair value estimate to $85 from $91. The share price bounced back slightly after initially declining 8% in aftermarket trading. However, despite our fair value cut, we still see a favorable opportunity as shares remain in 4-star territory. Conditions appear unfavorable for the next couple of quarters, but the lower sales volume should lead to relatively better free cash flow generation during that time, funding share repurchases while shares are priced at a severe discount, in our view. Arrow remains a high uncertainty company, but we reiterate our long-term thesis on the firm’s position as a leading value-added distributor.

The preliminary results suggest enterprise computing solutions performed at the low-end of prior guidance, growing roughly 4.5% sequentially to $2.05 billion while global components increased by roughly 1.1% over the same period. On an adjusted basis, after adding the $78 million in excluded sales from the personal computer disposition, the expected $5.33 billion in second-quarter revenue from the components segment would be essentially flat year over year but a far sight lower than the $5.6 billion previously expected from the segment.

After management had indicated an acceleration in component demand in the prior call, the steep deterioration was surprising. That said, the combination of the Huawei ban, tariff actions, and general trade uncertainty are not straightforward to forecast and it was this combined cocktail of geopolitical factors that led to a dramatic dampening in component demand. Management expect conditions to remain restrained for the next couple of quarters and will provide more detailed guidance in the scheduled earnings call in August.