A month has gone by since the last earnings report for Avnet (AVT). Shares have added about 7.8% 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 the most recent earnings report in order to get a better handle on the important drivers.
Avnet Q2 Earnings & Revenues Meet Estimates
Avnet reported second-quarter fiscal 2019 results, wherein both the top line and bottom line matched the Zacks Consensus Estimate.
The company delivered non-GAAP earnings of $1.04 per share, up 33% year over year. An unfavorable currency loss decreased the bottom line by 2 cents.
Avnet’s quarterly revenues of $5.1 billion increased 12% year over year on a reported basis and 13.1% on constant currency basis. Revenues came within the company’s guided range of $4.9-$5.3 billion.
The company’s solid results can be attributed to strength in vertical markets such as industrial, defense, aerospace and healthcare despite a slight slowdown in transportation demand. Continued transformation efforts and commitment to accelerate the Electronic Components business, including the replacement of revenues from supplier program changes, were key drivers.
Revenues from the sale of IP&E (interconnect, passives and electromechanical) devices also remained strong with the addition of two new global supply franchises to its line card and extension of four regional supply franchises.
Healthy quarterly results were driven by continued strong worldwide demand for the Electronic Components segment, which grew 12.4% year over year to $4.7 billion.
Acceleration strategy execution in the Americas improved significantly and recorded 7.5% year-over-year growth to reach $1.3 billion. Notably, net promoter scores of the company increased considerably, indication an improvement in customer satisfaction.
Performance in the EMEA region continued to be healthy with 10.8% sales growth to reach $1.7 billion.
Asia recorded $2.1 billion in revenues, up 15.2% year over year. However, a slowdown in the book-to-bill ratio loomed over Asia’s quarterly performance
Premier Farnell segment’s revenues totaled $368.3 million, up 2.8% year over year. During the quarter, seven new global supply franchises were added despite softness in single board computing sales, which slowed growth of this segment.
Its IoT solutions continued to witness rapid expansion of revenue pipeline as a result of its initiatives in the space through acquisitions and partnerships.
In the quarter, Avnet closed a multi-million-dollar deal with a smart health company to provide self-designed hardware for getting the latter’s solution to market.
Notably, the company acquired Softweb Solutions to enhance its portfolio and IoT capabilities. Softweb has world-class AI data advisory and digital development services, which make it a perfect addition to the Avnet ecosystem.
Avnet continued to benefit from its partnership with Microsoft, which referred the solutions of the former to its IoT partners, the most notable being Starbucks, giving it attractive customer expansion opportunities.
During the quarter, Avnet also introduced the SmartEdge Agile to develop machine learning applications, such as predictive maintenance and remote monitoring, and SmartEdge Industrial IoT Gateway, designed for automation applications that need strong end-to-end security.
During the quarter, strong momentum was also displayed in the company’s e-commerce revenues, making management optimistic about its aim to hit $1 billion of e-commerce revenues in fiscal 2019.
Additionally, the company continued to focus on transformation, additional integration with Premier Farnell and low-cost regions to expand the business.
Avnet reported gross profit of $630 million, up 4.6% year over year. However, gross margin contracted 85 basis points (bps) to 12.5% as a result of higher revenue mix from Asia, which is a low-margin region.
Adjusted operating income increased 27.5% from the year-earlier quarter to $178.8 million. Adjusted operating margin came in at 3.5%, up 44 bps.
Balance Sheet and Cash Flow
Avnet exited the fiscal second quarter with cash and cash equivalents of $482.2 million compared with $365.9 million recorded in the previous quarter.
Long-term debt was $2 billion compared to $1.6 billion in the previous quarter.
The company returned $197 million to shareholders in the form of $175 million worth repurchased shares and $22 million worth dividend.
For third-quarter fiscal 2019, the company estimates sales in the range of $4.5-$4.9 billion, representing year-over-year decline of 2% at mid-point of $4.7 billion, due to slowdown in Asia. Revenues from all other geographies are expected to be flat or higher sequentially.
Non-GAAP earnings per share are estimated in the range of $1.03 cents to $1.13, representing growth of 6% at mid-point of $1.08. Even with lower sales, sequential and year-over-year growth in non-GAAP earnings is expected due to continued cost optimization programs and lower share count.
How Have Estimates Been Moving Since Then?
Fresh estimates followed an upward path over the past two months.
At this time, Avnet has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top quintile 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 #3 (Hold). We expect an in-line return from the stock in the next few months.
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