On Jan 3, 2014, we reiterated our Neutral recommendation on electronic component distributor Arrow Electronics Inc. (ARW). Despite the encouraging fourth-quarter guidance provided by the company and the positive impact of annual cost savings and expected contributions from Europe, we remain on the sidelines due to the cyclicality of the components business and competition from its peers.
Why the Reiteration?
During third-quarter 2013, Arrow posted lower-than-expected results. However, the year-over-year comparisons were favorable as the company witnessed an increase in revenues from Global components business and reported margin expansions due to lower-than-expected operating costs.
The company also provided an encouraging guidance for the fourth quarter. Arrow expects sales to range between $5.6 billion and $6 billion, reflecting a sequential increase in revenues. The Zacks Consensus Estimate is pegged at $5.79 billion.
The company expects non-GAAP earnings per share to range between $1.56 and $1.68. The Zacks Consensus Estimate stands at $1.62 per share.
Apart from these factors, Arrow’s core strength of providing best-in-class services and easy-to-acquire technologies are expected to bolster its growth in the future. Moreover, the company has secured a significant market share through its broad portfolio of products and services and continued efforts to maximize consumer satisfaction.
Moreover, the company has been buying back shares for the last couple of years to create value for its shareholders. Share buybacks are a good way to return cash to investors when growth opportunities are limited. They also have a positive effect on earnings per share.
However, a significant portion of the company’s revenues comes from the sale of semiconductors, which is a cyclical industry characterized by changes in technology and manufacturing capacity and is subject to significant market upturns and downturns. Moreover, the company’s European exposure can adversely affect total revenue growth.
Currently, Arrow has a Zacks Rank #3 (Hold). Some of the better-ranked stocks that investors can look at are Stratasys (SSYS), Micron (MU) and SanDisk (SNDK). While Stratasys sports a Zacks Rank #1 (Strong Buy), Micron and SanDisk carry a Zacks Rank #2 (Buy).