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Arrow Conflates with Microchip

Zacks Equity Research

Recently announced, Arrow Electronics Inc. (ARW) signed a global distribution contract with Microchip Technology Inc. (MCHP). This was done with the clear intent of improving Arrow’s customer services through ameliorating its end product portfolio.   

Incorporated in Delaware, Microchip is involved in developing and manufacturing microcontrollers, memory, analog and interface products for embedded control systems. The company’s microcontrollers business continues to grow at a rapid pace and account for a large chunk of its total business.

This agreement will add Microchip’s service solutions and wide array of embedded semiconductors, microcontrollers, wireless support solutions and memory devices to Arrow’s product database. In addition, according to this contract, Microchip’s other service offerings will now also be accessible through Arrow‘s Nu Horizons Electronics.

Management was quite optimistic regarding its decision to conflate with Microchip as its improved design and technology would enhance the company’s existing product offerings.

Arrow’s series of contract wins and acquisition activity may certainly have a positive impact on its businesses. However, the company recently reported total sales of $5.15 billion in the second quarter of 2012, down 7% year over year and 5.3% sequentially. The current macroeconomic challenges prevailing in the European region and slow growth in China adversely affected the company’s business in the quarter.

Arrow pertains to an industry where ominous competition is prevalent. Hence, the company should stay cautious of big players, such as Richardson Electronics Ltd. (RELL) and Avnet Inc. (AVT) in the industry.

The current Zacks Consensus Estimate for the third quarter of 2012 is $1.04, reflecting a year-over-year growth of (12.96%). Estimates for 2012 and 2013 are $4.54 and $5.12, representing annual growth of (12.50%) and 12.75%, respectively.

We currently maintain an ‘Underperform’ recommendation on Arrow. The stock carries a Zacks #4 Rank, translating into a short-term (1-3 months) ‘Sell’ rating.

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