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Third Avenue Management Comments on Avnet

- By Holly LaFon

Avnet (AVT) is a leading electronic components distributor. It distributes semiconductors, passive and electromechanical devices and embedded products, acting as an intermediary between components suppliers and end customers. Its services help customers evaluate, design-in and procure electronic components throughout the lifecycle of a customer's product, thereby enabling faster time to market as well as cost efficiencies in both the design and manufacturing processes for its customers. Continued innovation and increasing electronics in all types of industries (industrial, automotive, consumer, etc.) should spur demand for Avnet's services over the longer term.

What intrigued us about Avnet recently is that the company is in the process of transforming itself to focus on higher value-add and higher margin design and supply chain services. As part of that effort, it sold its lower-margin technology solutions business and acquired a U.K. company, Premier Farnell, to broaden its customer reach and provide it an earlier entr?e in the design cycle. Products go through various phases in their life cycle: idea generation to design to production. By getting involved earlier in the design process, Avnet can take a larger role, providing it an opportunity for servicing greater volumes, particularly if and when the product goes into mass production. Avnet received approximately $2.6 billion from the sale of its technology solutions business, of which it plans to use around $1.5 billion to pay down debt. Thus, Avnet's pro forma balance sheet as of year end 2016 was in a net cash position. It also recently increased its share buyback program by $500 million. The Company is cash generative and has opportunities for margin improvement both from revenue and cost synergies related to Premier Farnell as well as other ongoing cost reduction improvements and the completion of an enterprise resource planning (ERP) implementation. We were able to purchase shares of Avnet common stock at an attractive valuation of approximately 1.05x pro forma book value and a discount to estimated NAV.

From Third Avenue Management (Trades, Portfolio)'s Value Fund first quarter 2017 commentary.
This article first appeared on GuruFocus.