Morningstar | Avnet Continues Solid Run With in-Line Quarter; Maintaining $45 FVE
Narrow-moat Avnet reported fiscal second-quarter results in line with our expectations. Demand for electronic components was strong during the quarter while Premier Farnell posted decent growth and profitability on a year-over-year basis. However, as presaged by some of the firm’s suppliers, weakness in China remains a revenue headwind. We maintain our fair value estimate of $45 per share as we expect the weakness to be short-term amid increasing content and Internet of Things growth. In general, we were pleased to hear management describe advances on the road map previously set out. We were also encouraged by the details surrounding Avnet’s recent acquisition, Softweb Solutions, which management expects will help the firm further expand its capabilities in servicing the Internet of Things landscape.Sales for the second quarter increased 12% year over year to $5.05 billion but fell down slightly on a sequential basis. Electronic components continued to post strong growth as a result of robust interconnect and passives demand, with segment sales increasing by 12% versus the year-ago quarter. Premier Farnell’s growth was slightly more muted at 3% over the same period due to some weakness in compute products. Regionally, demand was broad-based. Both Americas and Europe had strong year-over-year revenue growth (7.5% and 11% respectively) while Asia posted 15% growth. However, Avnet’s management did stress that they were seeing signs of strain in the latter region, with the demand falling below parity as signaled by a current book to bill of 0.8/1. Gross margins were flat sequentially at 12.5% due to the strong growth from Asia during the quarter.
As a firm, adjusted operating margins expanded by 44 basis points year over year to 3.5% due to the strong cost-cutting initiatives currently under way, including further streamlining processes between Premier Farnell and the parent organization. Adjusted earnings in the quarter were $1.04 a share, up 1.5% sequentially.
Avnet is a technology solutions company with an ecosystem delivering design, product, marketing and supply chain knowledge for customers at every stage of the product lifecycle. The company's primary operating groups include: Electronic Components, which markets, sells and distributes electronic components including semiconductors, interconnect, passive and electromechanical components and other integrated components from electronic component manufacturers; and Premier Farnell, which distributes a portfolio of kits, tools, electronic components and industrial automation components, as well as test and measurement products to both engineers and entrepreneurs.
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