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Morningstar | AVT Updated Forecasts and Estimates from 04 Sep 2018

Avnet's fiscal fourth-quarter results topped our expectations and the high end of management's guidance for both revenue and adjusted earnings per share. Broad demand for components capable of powering Internet of Things products and increasing industrial connectivity requirements kept sales strong during the quarter. Avnet reiterated the emerging cross-selling and design opportunities between Premier Farnell and Avnet’s core component business and noted that the shared online communities, Hackster.io and element14, had reach 1 million total participants. We are encouraged by the positive results and are increasing our fair value estimate to $45 per share from $42 after rolling our model forward. We will maintain our narrow moat rating for the electronic distributor and note that shares are currently fully valued, in our view.

Fourth-quarter revenue was $5.06 billion, a 10% increase from the year-ago quarter and an increase of 6% sequentially. Components sales grew at a robust 9.6% year over year, with strong demand from Asia driving growth. Automotive and industrials were noted to be growing particularly quickly, in line with what we have seen recently from several of Avnet’s suppliers. Premier Farnell slowed its sequential increase, while still growing at 13% year over year. We were pleased to hear management describe the growth of Avnet’s digital assets, with web-based sales doubling year over year and online transactions now accounting for more than half of total sales. This has been an important initiative for driving efficiency and securing more customers and we are pleased to see green shoots in the firm’s long-term strategy. Management also discussed the previously announced deal with Microsemi, which has now chosen Avnet as global lead distributor. While we expect the gross margins will decline in the back half of 2019 as fulfillment sales come on line, (re)securing the large semiconductor company is undoubtedly a boon to the firm.

Gross margin declined 60 basis points sequentially to 13%. As indicated above, this was predominantly due to the increased amount of Asian component sales in the mix. Encouragingly, operating margin expanded 50 basis points year over year, despite the regional mix, to 2.5%, in part due to management driving further efficiencies within Premier Farnell. With a current book to bill of 1.1, Avnet continues to see strong demand across end markets. Revenue guidance for the first quarter of 2019 is $5 billion at the midpoint, which would represent a slight decline sequentially but a 7% increase year over year. Adjusted earnings per share for the first quarter are expected to be $1.00 at the midpoint, roughly flat with fourth quarter’s $0.99.