A month has gone by since the last earnings report for Avnet (AVT). Shares have added about 2.1% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Avnet due for a pullback? 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 drivers.
Avnet Q4 Earnings Lag Estimates
Avnet recently reported fourth-quarter fiscal 2019 results, wherein the bottom line missed estimates but the top line beat the same.
Its non-GAAP earnings were 95 cents per share, missing the consensus estimate of $1. The bottom line also declined 4% year over year.
Revenues of $4.68 billion beat the Zacks Consensus Estimate of $4.59 billion. The figure, however, decreased 7.5% year over year. Nonetheless, the top line came within the company’s guided range of $4.5-$4.9 billion.
Persistent weakness in the components industry due to macroeconomic headwinds hurt the top line. Weakness in the industrial and automotive segments due to the downturn in Asia was further aggravated by the headwinds from Europe. Moreover, shorter lead times and lower average selling prices led to higher-than-expected pricing and margin pressures, affecting the bottom line.
However, proactive measures taken to decrease expenses mitigated the headwinds to an extent. Strong performance in vertical markets such as defense and aerospace, new opportunities in retail and healthcare (particularly medical devices) were positives.
Electronic Components segment fell 7.1% year over year to $4.34 billion. However, management noted that this segment witnessed encouraging momentum in the Americas, driven by 10% growth in revenues from design wins. During the quarter, Americas’ Net Promoter Score significantly increased, indicating customer satisfaction. Despite macroeconomic challenges, which led to a 5.4% year-over-year decline in sales, the Americas exited the quarter with book-to-bill ratio above parity.
Revenues from EMEA region fell 7.9% year over year, particularly due to weakness in Europe. Book-to-bill for the segment remained below parity. However, during the quarter, suppliers witnessed strong growth, receiving more than 20 awards.
Further, Asia revenues were down 8.5% year over year due to macroeconomic issues. Book-to-bill in the region was below parity at the end of the quarter.
Premier Farnell segment’s revenues totaled $343.4 million, down 12% year over year. Brexit continued to impact the investing and purchase decisions in the United Kingdom, which represents 20% of global sales of the segment. Additionally, a demand shift from high service catalog business to volume players driven by stabilized inventory led to pricing pressures.
However, toward the end of the fiscal fourth quarter, Farnell benefited from the launch of new Raspberry Pi 4 Model B computer. Notably, the segment is the largest licensed distributor of Raspberry Pi single board computing.
Notably, Avnet continued to expand its Farnell portfolio, adding 159,000 SKUs and three new supply lines including Renesas, to its website. Moreover, e-commerce global order penetration also witnessed a significant increase, and currently represents 70% of all Farnell orders.
Avnet’s IoT solutions witnessed rapid expansion of revenue pipeline as a result of its initiatives in the space and deal wins in areas such as retail and healthcare. The pipeline reached $630 million, up 5% sequentially. Also, Avnet’s IoT strategy continued to benefit from its partnership with Microsoft.
Avnet reported gross profit of $595.13 million, down 9.6% year over year. Gross margin declined 30 basis points (bps) to 12.7%, partly due to lower revenues and contracting margins in Farnell.
Adjusted operating income decreased 13.2% from the year-earlier quarter to $156.25 million. This was partly due to decreased operating income in Farnell led by decline in passive.
Adjusted operating margin came in at 3.3%, down 30 bps.
However, continued focus on cost reduction efforts was a positive. Notably, SG&A expenses declined $40.6 million year over year. In the Farnell segment, during the quarter, Avnet moved approximately 100 roles to its India-based shared service operations and streamlined headcount.
Balance Sheet and Cash Flow
Avnet exited the fiscal fourth quarter with cash and cash equivalents of $546.1 million compared with $725.3 million recorded in the previous quarter.
Long-term debt was $1.42 billion compared with $2 billion in the prior quarter.
The company returned $138 million to shareholders in the form of $117 million worth repurchased shares and $21 million worth dividend.
Full Fiscal-Year Highlights
For the fiscal year ended Jun 29, 2019, Avnet generated $19.52 billion in revenues, up 2.5% year over year.
Earnings per share increased 15% to $4.11.
Cash flow from continuing operations came in at $591 million, and SG&A expenses were down 6% year over year.
For first-quarter fiscal 2020, the company estimates sales in the range of $4.4-$4.7 billion, representing an 8% decline at mid-point of $4.55 billion.
Non-GAAP earnings per share are estimated in the range of 60-70 cents, indicating a decline of 36.9% at mid-point of 65 cents.
Sequential decline in sales in the Americas and EMEA regions are expected to be an overhang on the top line. Revenues are expected to be stable in Asia in the fiscal first quarter.
Lower sales of high margin products in IP&E, especially passives are expected to keep margins under pressure throughout the current calendar year and well into calendar 2020.
Avnet’s new warehouse is expected to come online in December this year, enabling the company to reduce costs and increase SKU count and improve service.
Farnell’s distribution center in the EMEA region is scheduled to ramp operations in the second half of fiscal 2020. This will allow the company to continue SKU expansion, reduce operating costs by almost $20 million per annum.
Market pressures are expected to persist in the near term. Avnet anticipates operating margins to remain below 10% in the forthcoming quarters.
Moreover, it will continue to integrate Farnell back office function, and shift its operations to lower cost areas to achieve the goal of 15% operating margin and $20 million annual savings.
How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -32.91% due to these changes.
Currently, Avnet has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 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.
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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