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Why Is Avnet (AVT) Down 8.7% Since Last Earnings Report?

Zacks Equity Research
Atlassian Corporation PLC (TEAM) closed the most recent trading day at $129.55, moving -0.84% from the previous trading session.

It has been about a month since the last earnings report for Avnet (AVT). Shares have lost about 8.7% 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 catalysts.

Avnet Q3 Earnings Beat Estimates, Revenues Miss

Avnet reported third-quarter fiscal 2019 results, wherein the bottom line beat the Zacks Consensus Estimate but the top line missed the same.

Its non-GAAP earnings were $1.09 per share, surpassing the consensus estimate of $1.08. The bottom line also jumped 6.9% year over year.

However, Avnet’s quarterly revenues of $4.7 billion missed the Zacks Consensus Estimate of $4.8 billion and decreased 2% year over year. Nonetheless, revenues came within the company’s guided range of $4.5-$4.9 billion.

Strong performance in vertical markets such as defense and aerospace, and improved performance in the western region of the Americans and EMEA contributed to the top line. Improved revenue mix of higher-margin businesses, cost control measures and better managed working capital drove revenues.

However, weakness in the industrial and automotive segments due to the downturn in China, and overall slowdown in sales in Asia hurt the top-line performance.

Revenues from the sale of interconnect and passives devices remained strong with high single digit growth.

Quarter Details

Electronic Components segment fell 1.7% year over year to $4.3 billion. However, management noted that this segment witnessed strong recovery in the Americas, where revenues grew in high single digits year over year. In the third quarter fiscal 2019, the segment saw the most number of design wins in the past six quarters.

Acceleration strategy execution in the Americas improved significantly and recorded 1.6% growth to reach $1.3 billion.

Performance in the EMEA region declined 3.9% to $1.7 billion. However, Avnet’s Abacus business, which specializes in interconnect and electromechanical products, performed well.

Asia recorded $1.6 billion in revenues, down 2.7% year over year due to macroeconomic issues. However, book-to-bill ratio improved. The recent passage of economic stimulus measures in China is expected to improve divisions.

Management noted that the transition to a data-driven economy is expanding Avnet's addressable markets with innovations in silicon; software and artificial intelligence; and 5G connectivity.

During the quarter, Avnet’s solutions pipeline continued to grow.

Premier Farnell segment’s revenues totaled $367.5 million, down 6% year over year. Firstly, Brexit impacted the investing and purchase decisions in the United Kingdom, which represents 20% of global sales of Farnell. Secondly, continued lull in sales of single-board computers remained an overhang.

However, the segment’s profitability was impressive in the quarter with operating income margins up 160 basis points (bps) year over year. Strong execution within Farnell was a positive.

Its IoT solutions witnessed rapid expansion of revenue pipeline as a result of its initiatives in the space and deal wins in areas such as industrial equipment and manufacturing. The pipeline has reached more than $600 million.

Also, Avnet benefited from its partnership with Microsoft. Moreover, its technology partners continued to grow.

Margins

Avnet reported gross profit of $624.2 million, down 4.5% year over year. Gross margin contracted 30 bps to 13.3%.

Adjusted operating income increased 4.3% from the year-earlier quarter to $178.1 million. Adjusted operating margin came in at 3.8%, up 23 bps, due to cost reduction efforts.

Balance Sheet and Cash Flow

Avnet exited the fiscal third quarter with cash and cash equivalents of $725.3 million compared with $482.2 million recorded in the previous quarter.

Long-term debt was $2 billion compared with $1.5 billion in the prior quarter.

The company returned $139 million to shareholders in the form of $117 million worth repurchased shares and $22 million worth dividend.

Guidance

For fourth-quarter fiscal 2019, the company estimates sales in the range of $4.5-$4.9 billion, representing a 7% decline at mid-point of $4.7 billion.

Macro headwinds in the Western regions are likely to offset the slight sequential uptick in revenues from Asia, thus affecting the top line in the quarter.

This change in sales mix is expected to result in a sequential decline to gross profit.

Non-GAAP earnings per share are estimated in the range of $1 to $1.08, indicating growth of 5% at mid-point of $1.04. 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 a downward path over the past two months.

VGM Scores

At this time, Avnet has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. 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.

Outlook

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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