On Mar 28, 2014, we issued an updated research report on Arrow Electronics Inc. (ARW) after it reported better-than-expected fourth-quarter results.
Arrow’s year-over-year comparisons were modestly up and it had a favorable book-to-bill ratio. In addition, positive commentary about enhanced productivity, annual cost savings and continued higher contributions from Europe were encouraging.
Arrow’s strong distribution channels are being preferred by original equipment manufacturers, contract manufacturers and commercial customers to market their products. The company’s core strength in providing best-in-class services and easy-to-acquire technologies will act as growth catalysts.
Moreover, the company has secured a significant market share through a broad portfolio of products and services, and continued efforts to maximize consumer satisfaction. Additionally, incremental sales from the strategic acquisitions, such as Computerlinks, are expected to boost Arrow’s top line.
It is worth noting that, spending on electronic equipments are dependent on the overall IT spending. Per the U.S. research firm Gartner, overall IT spending is expected to grow 3.1% in 2014, primarily driven by enterprise software and IT services. As a specialized distributor of these products and services, Arrow Electronics stands to benefit from the projected increase.
However, Arrow derives a significant portion of its revenues from the sale of semiconductors — a cyclical industry characterized by changes in technology and manufacturing capacity and is subject to significant market upturns and downturns. According to World Semiconductor Trade Statistics (:WSTS) data, worldwide semiconductor sales are expected to grow at 4.1% in 2014, followed by 3.4% growth in 2015. Therefore, a slowdown in this market might decelerate the company’s business in 2015.
Moreover, Arrow has a highly leveraged balance sheet. As of Dec 31, 2013, the company’s net debt amounted to $1.86 billion, which deteriorated from a net debt position of $1.69 billion as on Sep 28, 2013. Additionally, competition from Avnet (AVT) and Ingram Micro (IM) remain the headwind.
Currently, Arrow Electronics has a Zacks Rank #3 (Hold). Investors may consider a better-ranked stock like Juniper Networks (JNPR) sporting a Zacks Rank #1 (Strong Buy).