It has been about a month since the last earnings report for Avnet (AVT). Shares have lost about 0.7% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Avnet due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Avnet's Q3 Earnings & Revenues Beat Estimates
Avnet recently reported third-quarter fiscal 2020 results, wherein both top and bottom lines beat estimates.
Its non-GAAP earnings were 38 cents per share, surpassing the consensus mark by 31%. However, the metric plunged 65% year over year.
Revenues of $4.31 billion surpassed the Zacks Consensus Estimate by 7.2% but decreased 8.5% year over year. Nonetheless, the top line matched the midpoint of the company-guided range of $4.1-$4.5 billion.
Strong demand in the aerospace and defense market was a tailwind. However, weakness in automotive and industrial end markets was a concern.
Soft demand from Asia was a deterrent. Moreover, lower pricing and higher costs related to the impact of coronavirus on the company’s logistic operations affected the bottom line.
Quarter in Detail
Electronic Components segment fell 8.2% year over year to $4 billion due to lower revenues in Asia as a result of the Chinese New Year and COVID-19.
Revenues from the Americas declined 7.2% year over year and that from the EMEA region was down 13.1%. Further, Asia revenues dropped 4% year over year.
Premier Farnell segment’s revenues of $335.1 million decreased 8.8% year over year.
During the quarter, Avnet expanded its partnership with Micron. The company also inked a global distribution deal with Sequans Communications for modem component Monarch Go to launch new IoT devices on Verizon with no additional testing, significantly reducing time to market. Moreover, Avnet also won ON Semiconductor’s 2019 Distributor of the Year award.
Avnet also saw lower revenues from Texas Instruments as their 40-year distribution partnership ended in the first quarter of 2020.
Avnet reported gross profit of $518.9 million, down 16.9% year over year. Gross margin shrank 130 basis points (bps) to 12%, primarily due to lower revenues from Asia as well as global pricing pressures.
Adjusted operating income was $70.4 million, plunging 60.5% year over year. Adjusted operating margin came in at 1.6%, down 216 bps.
Adjusted operating expenses increased primarily due to a reserve for a potential bad debt from a customer.
However, focus on cost-reduction efforts was a boon.
Balance Sheet and Cash Flow
Avnet exited the fiscal second quarter with cash and cash equivalents of $402.7 million compared with $488.8 million in the previous quarter.
Long-term debt was $1.19 billion, flat sequentially.
The company returned $58 million to its shareholders in the form of $37 million from repurchased shares and $21 million worth of dividends.
Cash flow was $98 million in the quarter.
Avnet is still in the process of assessing the potential impact of coronavirus on its business operations, financial performance and the results of operations in the fourth quarter. Therefore, the company refrained from providing a guidance for the fourth quarter of fiscal 2020.
Notably, Avnet expects to replace the Texas Instruments revenues with higher-margin revenues by the end of fiscal 2022.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -96.43% due to these changes.
At this time, Avnet has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. It's no surprise Avnet has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.
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