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Morningstar | Avnet Delivers Solid Growth But Mix Limits Upside; Maintaining $45 FVE

Avnet reported solid fiscal first-quarter results, with earnings in line with our previous forecast and revenue modestly exceeding our expectations. Demand for components was widespread, with all regions growing on a year-over-year basis but Asia growing in the high-teens for the second quarter in a row. However, while guidance for the second quarter also topped our prior forecast, the firm’s book/bill shows signs of declining from the recent highs of previous quarter. This, coupled with the fact that sales from Asia are generally lower-margin than the company average, tempers our outlook slightly for the full year. Thus, we are maintaining our fair value of $45 per share and narrow moat rating for the distributor company. We currently view shares as fully valued. We affirm our expectation for component demand to remain strong in the long-term amid growing Internet of Things products and increasing connectivity requirements. Similarly, near-term weakness in semiconductor and component demand does not impact our assessment that Avnet has a distinct cost advantage over most distributor rivals.

Revenue in the first quarter was $5.09 billion, increasing 9% year over year and nearly 1% on a sequential basis. Components sales grew at a robust 9.6% year over year, with strong demand from Asia driving growth. While automotive and industrials grew quickly in the prior quarter, Avnet reported to experience less weakness from these markets in the first quarter than many of the firm’s suppliers. Premier Farnell continued to grow strongly year over year by 7% while the sequential dip of 3% was expected due to seasonality. Gross margins declined 50 basis points sequentially to 12.5% due to the increased amount of lower-margin Asian sales in the mix. However, adjusted operating margin however continued to show signs of sustained improvement, increasing more than 60 basis points year over year to 3.6%, despite the impact of the regional mix.

We expect growth for Premier Farnell to remain in the high-single digits on year-over-year basis throughout the fiscal year due to a combination of component demand and successful growth of Avnet’s online properties. Avnet reiterated the goal to reach over $1 billion in total online sales for the year and the healthy growth in the firm’s collection of online communities (now totaling more than 1.2 million members versus 1 million in the prior quarter) gives us confidence that they will achieve that. The firm’s book to bill declined from recent highs to a ratio of 1.04 (versus 1.1 in the prior quarter). In light of this, management expects fiscal second-quarter revenue to reach $5.1 billion at the midpoint of guidance, essentially flat with the current quarter but representing year-over-year growth of nearly 13%. The firm expects adjusted earnings to increase by 32% to $1.03 in the next quarter.