Why You Should Hold on to Arrow Electronics (ARW) Stock Now
A successful portfolio manager understands the importance of adding well-performing stocks at the right time. Indicators of a stock’s bullish run include a rise in its share price and strong fundamentals.
One such stock that investors need to hold on to right now is Arrow Electronics Inc. ARW. There are a few concerns regarding the stock which are short lived but it has the potential to perform well in the long run.
The stock has returned approximately 12.6% in the past one year, outperforming the Zacks Electronics Parts Distribution industry’s gain of 4.1%.
Let’s look at the reasons behind Arrow’s solid momentum.
What’s Driving the Stock?
Arrow reported impressive first-quarter fiscal 2017. Revenues surpassed the Zacks Consensus Estimate. The company’s quarterly revenues and earnings not only marked a year-over-year improvement, but also surpassed the respective Zacks Consensus Estimate. The figures came above the mid-point of the company’s guided ranges.
Arrow’s non-GAAP earnings of $1.46 per share beat the Zacks Consensus Estimate by a couple of cents and came above the mid-point of its guidance range of $1.37–$1.49 (mid-point $1.43 per share). Earnings increased from $1.43 per share reported in the year-ago quarter.
Arrow’s revenues, on a reported basis, were $5.760 billion, up 5.2% from the year-ago quarter. Quarterly revenues surpassed the Zacks Consensus Estimate of $5.572 billion and came above the mid-point of the company’s guidance range of $5.375–$5.775 billion (mid-point $5.575 billion).
Buoyed by the splendid first-quarter performance, the company provided a strong revenue and earnings guidance for the second quarter which is well ahead of our expectations.
For the second quarter, sales are expected between $5.975 billion and $6.375 billion. The Zacks Consensus Estimate is pegged at $6.19 billion. Global components sales are projected in a range of $4.05–$4.25 billion. Global enterprise computing solutions sales are estimated to be in the range of $1.925–$2.125 billion.
The company projects non-GAAP earnings per share in the range of $1.70–$1.82. The Zacks Consensus Estimate is pegged at $1.76.
Over the past 60 days, fiscal 2017 estimates were revised upward, taking the Zacks Consensus Estimate up from $6.99 per share to $7.11. Arrow also delivered positive earnings surprises in two out of the last four quarters with an average beat of 0.9%.
Original equipment manufacturers, contract manufacturers and commercial customers are selecting Arrow’s distribution channels for marketing their products. The company’s core strength in providing best-in-class services and easy-to-acquire technologies are anticipated to prove conducive to growth in the quarters ahead.
From a valuation perspective, the stock looks attractive as it currently trades significantly lower than the industry’s average based on a forward earnings estimate. This signifies huge upward potential. Arrow currently trades at a forward P/E of 10.62x compared with the industry’s group average of 13.20x.
Given that the company’s long-term earnings per share growth rate is 9.4% and has a Value Style Score of 'A', we believe that the stock has much upside potential.
Risks Remain
Meanwhile, incremental sales from strategic acquisitions, such as Computerlinks, are anticipated to boost the top line. Uncertain economic conditions, a high debt burden and competition from the likes of Avnet AVT remain concerns.
Bottom Line
Keeping these positives in mind, we feel Arrow is one such technology stock that deserves a place in investors’ portfolio. We can essentially filter the negatives and focus on the positives which drive price.
Arrow carries a Zacks Rank #3 (Hold). Other better-ranked stocks in the broader technology sector are Applied Materials, Inc. AMAT and Marvell Technology Group Ltd. MRVL, both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The long-term expected earnings per share growth rate for Applied Materials and Marvell are 16.58% and 15.49%, respectively.
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