Avnet (AVT, Financial) recently ranked high on both Value and Yield Leader Rankings, highlighting its appealing 14x forward earnings valuation and a 2.8% dividend yield. As a global distributor of electronic components, Avnet supplies businesses of all sizes, including startups and electronic manufacturing services (EMS) providers. Despite operating with slim margins, as shown by its 2.8% adjusted operating margin in Q2, Avnet maintains a steady revenue stream of approximately $5.6 billion over the past four quarters.
In the semiconductor industry, tariff-related uncertainties pose challenges, potentially increasing costs and decreasing customer spending. Avnet has navigated similar situations before, successfully passing increased costs to customers without affecting its P&L. The company remains confident in managing current challenges, leveraging strong supplier relationships to mitigate impacts and source products from tariff-free countries, thus aiming for minimal impact on its bottom line.
- Avnet faces a downturn with inventory build-up as demand weakens across sectors, except AI. The EMEA region, Avnet's most profitable market, experienced significant weakness compared to the Americas and Asia. However, aerospace and defense markets showed moderate growth in Q2, with potential for further growth due to the EU's defense initiatives, potentially stabilizing margins.
- In the Americas, aerospace and defense markets also grew in Q2. Despite a year-over-year revenue decline due to tariff concerns, only about 8% of Avnet's business in the Americas involves China. Customers may need time to adjust their supply chains for tariff impacts.
- Asia was the only region to see year-over-year sales growth in Q2, although it has the lowest margins, affecting Avnet's overall margins. This marks the second consecutive quarter of growth in Asia, indicating regional economic resilience and a positive outlook for other regions.
Tariffs pose a short-term concern, affecting demand stabilization timing in EMEA and the Americas. However, Asia's growth hints at a potential recovery in Western markets. Despite tariff worries, Avnet's shares have only declined by 11% from January highs, presenting an opportunity for buy-and-hold investors. A 15-20% stop loss limit is advised.
