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Arrow Electronics (ARW) Down 14.1% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Arrow Electronics (ARW). Shares have lost about 14.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Arrow Electronics due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Arrow Reports Q1 Results

Arrow recently reported mixed first-quarter results, wherein earnings missed estimates but revenues surpassed the same. Moreover, earnings declined on a year-over-year basis while revenues improved.

Arrow’s non-GAAP earnings of $1.84 per share missed the Zacks Consensus Estimate of $1.90, and decreased 2.1% year over year.

Notably, continued deceleration in the industry for components in the trailing two quarters resulted in customer mix and a demand shift to lower margin products. This is keeping the bottom line under pressure.

The company also faced foreign currency headwinds amounting to $197 million on sales and 9 cents on EPS during the quarter.

Nonetheless, the company’s revenues were $7.16 billion, up 4% from the year-ago quarter. After adjusting for the impact of foreign currencies and spin offs, the figure came in at $7.14 billion, up 7.6% from the adjusted sales of the prior-year quarter. The top line also beat the Zacks Consensus Estimate of $6.93 billion.

A Peek Into Q1 Results

Adjusted revenues from Global Components increased 8% year over year to $5.19 billion. Geographically, the segment’s revenues from the Americas increased 6% and that from Asia climbed 8%. Growth in Asia was partly because of a surge in demand for the company’s low-margin wireless device business.

Global components contribution from Europe rose 2% on a reported basis, and 10% on an adjusted basis.

Adjusted revenues from Global Enterprise Computing Solutions (ECS) came in at $1.96 billion, up 6% year over year. ECS revenues from the Americas were up 4% after adjusting for the divestiture of Unified Communications and foreign currency changes. Sales from Europe jumped 10% year over year after adjusting for foreign currency changes and spin offs of two businesses; one completed during the quarter and the other completed in the prior-year quarter.

ECS growth was driven by strong momentum in servers, infrastructure software, storage and security. The segment witnessed some demand momentum in non-traditional systems integrator and operational technology provider customers.

The Global Components segment gained from design activity, up 3% year over year.

Many customers began to shift their manufacturing operations out of the United States to avoid tariffs, posing a significant threat to Arrow. Apart from other things, this also led to the push out of several high value orders.

Nonetheless, the company continued with its innovations, launching an engineering marketplace platform, ArrowPlus, in partnership with Freelancer.com, during the quarter. The collaboration will enable Arrow Electronics to expand its reach to the 32 million users on Freelancer.com.

Also, the company will utilize Freelancer.com’s platform and expertise in running global online services marketplaces. It will be used to solve advanced technological issues related to consumer electronics, transportation, healthcare, industrial IoT, telecommunications, biomedical, cloud security, firmware, hardware and connected products in every industry.

Margins

Gross profit decreased 1% from the previous-year quarter to $861.69 million.

Arrow’s non-GAAP operating income was down 0.8% year over year to $270.02 million. Non-GAAP operating margin of 3.8% was 30 basis points lower.

Management notes that approximately one-third of the margin decline came from market pressure across all regions, one-third from the unfavorable customer and products mix in Asia for the components business, and one-third from the $10 million loss of operating income by an ancillary business within Global Components.

Balance Sheet and Cash Flow

Arrow exited the quarter with cash and cash equivalents of $352 million compared with $509.33 million in the previous quarter.

Long-term debt was $3.6 billion compared with $3.2 billion at the end of the prior quarter.

During the quarter, the company’s cash outflow from operations was $329 million.

In the first quarter, Arrow returned approximately $40 million to shareholders through stock repurchase program, and was left with approximately $689 million of authorization.

Guidance

For the second quarter of 2019, sales are expected between $7.53 billion and $7.93 billion.

Global components sales are projected in the range of $5.5-$5.7 billion. Global ECS sales are estimated to be $2.03-$2.23 billion.

Interest expenses will presumably be about $57 million, as a result of which, the company projects non-GAAP earnings per share in the range of $1.94-$2.06. Average non-GAAP tax rate around the higher end of the 23.5-25.5% range is included in the guidance.

Foreign currency headwind of approximately $138 million on sales and 7 cents on earnings per share is expected in the second quarter.

Profitability improvement activities for the ECS, which was undertaken during the fourth quarter of 2018, are expected to continue throughout the rest of 2019.

An operating income loss of $12 million from the ancillary business in the Global Components segment is expected to keep margins under pressure in the second quarter of 2019.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -9.3% due to these changes.

VGM Scores

Currently, Arrow Electronics has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Arrow Electronics has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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