Arrow Electronics (ARW, Financial), operating through two segments – Global Components and Global Enterprise Computing Solutions – provides products, services and solutions to industrial and commercial users of electronic components and enterprise computing solutions globally. The company posted first-quarter 2015 results, which was a mixed bag as it missed consensus estimates on the top line. Let’s take a look at the results and the long-term story of the company.
Looking back
Arrow’s revenues registered a year-over-year decline of 1.6% to clock $5.002 billion. However, on an adjusted basis, revenues soared 3.4% year over year. The electronics component distributor, the revenues from global components declined 2.2% versus the year-ago quarter to notch $3.347 billion, and revenues from the Global enterprise computing, or ECS, remained flat year over year to record $1.655 billion. As a result of a muted sales performance, Arrow failed to trump consensus estimates of $5.096 billion.
Arrow’s adjusted net income came in at $127.7 million or $1.32 per share versus $124.1 million or $1.22 in the comparable quarter in the prior year. Consensus estimates were pegged at $1.31 per share. Also, the adjusted earnings registered a year-over-year gain of 8% on the back of better cost management and lower share counts.
Total first quarter book to bill was 1.02 and the overall market remains stable with lead times and cancellation rates being in the normal range.
Shopping for growth
Arrow has been on a shopping binge to drive growth. For example, the company announced this month the successful completion of the acquisition of ATM Electronic Corp., a leading electronic component distributor headquartered in Taipei, Taiwan, with substantial operations in China.
In March this year, the electronic components distributor announced successful completion of acquisition of immixGroup, Inc., a value-added distributor supporting over 800 value-added resellers, solution providers and service providers. ImmixGroup, Inc. is headquartered in McLean, Va. This acquisition is expected to be $.10 to $.14 accretive to earnings per share, excluding the impact of the amortization of related intangible assets, in the first year post closing.
Arrow Electronics acquired United Technical Publishing, a division of Hearst Business Media and a leading digital provider of product information to the global electronics components industry. “By combining the value-creation capabilities of Arrow Electronics and the digital tools and resources in United Technical Publishing’s businesses, we are providing the global electronics components community a comprehensive set of offerings to meet their strategic information needs,” said Matt Anderson, chief digital officer at Arrow.
In February this year, Arrow announced the acquisition of RDC, a wholly owned subsidiary of Computacenter UK Ltd. “This acquisition further broadens Arrow’s value recovery business in Europe,” said Michael J. Long, chairman, president and CEO of Arrow. “RDC will allow us to better address the growing requirements of our global customers.”
Looking ahead
Investors may genuinely be worried about the impact of a weakening euro on demand for the company's products and solutions going forward. However, the management has offered assurance and had the following to say during the earnings call:
“The second common question is, will the decreased purchasing power of the euro result in lower demand from the region? Our answer is we haven't seen it. Our healthy growth rates for both our European components and our Europe ECS business reflect our strong execution but also improving underlying demand.”
For six consecutive quarters, Arrow has increased return on invested capital, or ROIC, versus the year-ago periods. Despite the headwinds of Forex fluctuations, the company has demonstrated that it can perform well.
During the quarter, the company repurchased $64 million worth of shares in the first quarter and approximately $279 million over the last 12 months. It still has $197 million of unutilized funds under the existing authorization, and this can drive bottom-line growth going forward.
For the upcoming quarter, the company expects sales to be between $5.45 billion and $5.85 billion. EPS on a diluted basis, excluding any charges, is expected to be in the range of $1.43 to $1.55.
Final words
Arrow posted mixed first-quarter 2015 results. I expect acquisitions to drive growth going forward. However, negative impact of Forex fluctuations and competitive threats from Avnet (AVT, Financial) and Ingram (IM) are real and cannot be ignored. With a trailing P/E of over 12 and forward P/E of below 10, growth is expected going ahead. The company has seen five upwards and three downwards earnings revisions, for the second quarter, in the last 30 days. For the fiscal 2015, there have been 6 upward revisions and no downward revisions. For the next five years, analysts expect compound annual growth rate to be over 10%.
Hence, this stock is a buy for the long term.
