Arrow Electronics, Inc. (NYSE: ARW)

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1 Jul 08, 2015 Arrow Electronics, Inc. (NYSE: ARW) $ USD ( As of 07/07/15 ) Zacks Rank 3-Hold Style Scores: Growth: Value: Momentum: Data Overview 52 Week High-Low $ $ Day Average Volume 520,190 Beta 1.86 Market Cap 5.38 B Dividend / Div Yld $0.00 / 0.00% Industry ELEC PARTS DIST Industry Rank 203 / 265 (Bottom 23%) Growth Score Hist. EPS Growth (3-5 yrs) 9.10% Proj. EPS Growth (F1/F0) 4.86% Curr. Cash Flow Growth 15.12% Hist. Cash Flow Growth (3-5 yrs) 21.19% Summary New York-based Arrow Electronics is one of the world s largest distributors of electronic components and enterprise computing products. Its first-quarter 2015 earnings exceeded the Zacks Consensus Estimate. Moreover, the company provided encouraging second-quarter guidance. Arrow s core strength of providing best-inclass services and easy-to-acquire technologies will bolster its growth in the future. However, a significant portion of the company s revenues comes from the sale of semiconductors, which is a cyclical industry characterized by changes in technology and manufacturing capacity and subject to significant market upturns and downturns. Moreover, uncertain economic conditions, high debt burden and competition are the concerns, going forward. Elements of the Zacks Rank Agreement Estimate Revisions (60 days) Current Ratio 1.80 Debt/Capital 37.94% 0% 0% 0% 0% Net Margin 2.19% Return on Equity 14.26% Sales/Assets 1.95 Q1 (Current Qtr) Revisions: 0 Up: 0 Down: 0 Q2 (Next Qtr) Revisions: 0 Up: 0 Down: 0 F1 (Current Year) Revisions: 0 Up: 0 Down: 0 F2 (Next Year) Revisions: 0 Up: 0 Down: 0 Proj. Sales Growth (F1/F0) 1.24% Value Score Magnitude Consensus Estimate Trend (60 days) Cash/Price 0.06 EV/EBITDA 7.52 PEG Ratio NA Price/Book (P/B) 1.33 Price/Cash Flow (P/CF) 6.85 P/E (F1) Current Q1 0% Current Q2 0% Current F1-0.16% Current F2 0% Price/Sales (P/S) 0.24 Earnings Yield 11.13% Upside Zacks Consensus Estimate vs. Most Accurate Estimate Debt/Equity 0.61 Cash Flow ($/share) 8.16 Momentum Score Most Accurate: 1.50 Most Accurate: 1.44 Most Accurate: 6.22 Most Accurate: 6.70 Daily Price Chg -1.50% Zacks Consensus: 1.50 Zacks Consensus: 1.44 Zacks Consensus: 6.22 Zacks Consensus: Week Price Chg -0.02% Q1 0.00% Q2 0.00% F1 0.00% F2 0.00% 4 Week Price Chg -3.70% 12 Week Price Chg -8.28% Surprise Reported Earnings History 52 Week Price Chg -9.87% 20 Day Average Volume 531,298 (F1) EPS Est Wkly Chg 0.00% (F1) EPS Est Mthly Chg 0.00% (F1) EPS Est Qtrly Chg -0.07% (Q1) EPS Est Mthly Chg 0.00% Reported: 1.32 Estimate: 1.31 Q End 03/15 Reported: 1.88 Estimate: 1.82 Q End 12/14 Reported: 1.40 Estimate: 1.31 Q End 09/14 Reported: 1.43 Estimate: 1.42 Q End 06/14 Average 4 Qtr Surprise 2015 Zacks Investment Research, All Rights Reserved 10 S. Riverside Plaza Suite 1600 Chicago, IL 60606

2 The data on the front page and all the charts in the report represent market data as of 07/07/15, while the reports text is as of 07/08/2015 Overview New York-based Arrow Electronics Inc. (ARW) is one of the world s largest distributors of electronic components and enterprise computing products. Arrow provides one of the broadest product ranges in the electronic components and enterprise computing solutions distribution industries. Along with these, the company provides a wide range of value-added services to help customers reduce their marketing time, lower the total cost of ownership, introduce innovative products through demand creation opportunities and enhance their overall competitiveness. The company serves over 100,000 customers original equipment manufacturers (OEMs), contract manufactures (CMs) and commercial customers through 300 sales facilities and 40 distribution centers in over 85 countries. The company s customer base comprises OEMs, CMs, value-added resellers (VARs) and other commercial users. The company s products primarily target the industrial sector (companies manufacturing machine tools, factory automation equipment or robotics equipment). Arrow s offerings can be broadly divided into two categories: 1) Global Components: Arrow distributes electronic components to OEMs and CMs through its global components business segment. In 2014, approximately 63% of the company s revenues came from this segment. This segment deals in semiconductor products and related services; passive, electro-mechanical and interconnect products such as capacitors, resistors, potentiometers, power supplies, relays, switches and connectors; and computing and memory. 2) Global Enterprise Computing Solutions (ECS): Arrow provides enterprise computing solutions to VARs through its global ECS business segment. The computing segment includes products like servers, workstations, storage products, microcomputer boards and systems, design systems, desktop computer systems, software, monitors, printers, flat panel displays, system chassis and enclosures, controllers and communication control equipment. This segment accounted for about 37% of total revenue in Zacks Equity Research: ARW Page 2 of 8

3 Reasons To Buy: Arrow s core strength of providing best-in-class services and easy-to-acquire technologies is expected to bolster growth in the future. Moreover, the company has secured significant market share through its broad portfolio of products and services and continued efforts to maximize consumer satisfaction. The company s diverse product range includes ArrowSphere, UC in the Cloud solutions, engineering design capabilities and remote infrastructure-management (Live Virtual Help Desk) services. Recently, Arrow announced the improvement of its cloud service aggregation and brokerage portal, ArrowSphere. This platform is particularly designed for aggregating, We believe that Arrow s core strength of providing best-in-class services and easy-to-acquire technologies will bolster its growth in the future. merchandizing and delivering cloud-related services to system integrators, autonomous software dealers and IT service providers all over the world. There is a huge scope for the company to earn additional revenues through the enhancement of the cloud-related portal. We believe its expertise in understanding market dynamics and strong product portfolio will continue to support growth. Arrow has been active on the acquisitions front. In May 2015, the company acquired Taiwan-based electronic component distributor, ATM Electronic Corporation. The acquisition is expected to boost its operations in Taiwan and China. Apart from this, in March this year, the company completed the acquisition of immixgroup Inc., a value-added reseller of IT solutions. The move is likely to enhance Arrow s presence in the federal market where its sales are meager compared with immixgroup. According to Arrow, synergies from the acquisition will begin from the first year and expects it to contribute $0.10 $0.14 to 2015 earnings per share, excluding the impact of the amortization of related intangible assets. Furthermore, in Feb 2015, the company acquired RDC, a wholly owned subsidiary of Computacenter UK Ltd. In Jan 2015, the company stated that it will acquire all the outstanding shares of Data Modul AG for approximately $105 million. In Jan 2014, Arrow acquired a company for an estimated price of $60K. During 2013, the company completed the acquisition of four companies in addition to the Computerlinks acquisition. Also, the company s $300 million acquisition of Munich-based Computerlinks is expected to strengthen its distribution channels in the EMEA, North America and selected countries in the Asia Pacific region. Acquisitions are likely to enable Arrow to enter markets, diversify and broaden its product portfolio and maintain its leading position. Moreover, the company s continued acquisitions are expected to be a significant contributor to its revenue stream. Spending on electronic components and computer products is highly dependent on overall IT spending. Per U.S. research firm Gartner, overall IT spending is expected to grow 2.4% in 2015 which will mostly be driven by enterprise software and IT services. The research firm also expects IT spending to exceed $4.3 trillion by It is worth noting that during the twelve months of fiscal 2014, the Global ECS segment registered year-over-year growth of 7.6% mainly due to increased demand for storage, network and industry standard servers. Moreover, the company understands that in a world of globalization, where online networking and communication forms the base of all activities, security in digital content transmission for its customers is imperative. We expect strong demand in the coming quarters, which would position Arrow well to capitalize on the opportunity. Arrow has initiated restructuring activities to boost operational efficiency. The company s restructuring initiatives have helped it to reduce operating expenses over the past few years. As part of this initiative, the company s operating expenses shrank 0.8% in 2014 on a year-over-year basis and 1.4% in In the last-reported quarter, the company s operating expenses on a GAAPbasis decreased 30 basis points mainly on the back of operating leverage and efficiency initiatives. This reflects the company s ongoing efforts to trim expenses. The ongoing macro uncertainty, fiscal cliff in the U.S. and Euro issues prompted Arrow to plan for a productivity enhancement program. These initiatives will provide the company with adequate growth opportunities in the long run. Arrow returns cash to investors through share repurchases. In 2014, the company announced the repurchase of an additional $400 million of its common stock under a new share repurchase program. During first-quarter 2015, the company repurchased stocks worth $78.6 million. Share buybacks are a good way to return cash to investors when growth opportunities are limited. These also have a positive effect on earnings per share. Reasons To Sell: Arrow has a highly leveraged balance sheet. The company has always had a good amount of debt on its balance sheet. Its net debt position was $2.16 billion as of Mar 28, Liquidity is low, since cash and liquid assets are just a fraction of its total assets. We think that the company has limited financial flexibility because of its high debt burden and further increases in debt could make investment in the shares risky. Thus, the company has to generate substantial amount of cash flow to effectively service its debt. An uncertain economic conditions, competition from Avnet and Ingram Micro, and a leveraged balance sheet remain concerns. A significant portion of the company s revenues comes from the sales of semiconductors, which is a cyclical industry characterized by changes in technology and manufacturing capacity and is subject to significant market upturns and downturns. According to World Semiconductor Trade Statistics (WSTS) data, worldwide semiconductor sales were expected to grow 9% in 2014 but moderate to 3.4% growth by 2015 and 3.1% by Arrow s sale of semiconductor products and related services accounted for approximately 43%, 41% and 42% of consolidated sales in 2012, 2013 and 2014, respectively. Therefore, a slowdown in this market indicates a slowdown in the company s business for Arrow s competitors are also keen on solidifying their respective positions in the electronics distribution market through strategic acquisitions. In the past few years, Avnet acquired RTI Holdings, TSSLink, Nexicore Assets, Ascendant Technology, Seamless Technologies, Inc. and MSC Investoren GmbH (or MSC Group). Its competitor Ingram acquired Promark Technology, CloudBlue Technologies, Inc., Brightpoint and Anovo. The efforts broadened the scope of their product offerings as well as their geographical reach. Zacks Equity Research: ARW Page 3 of 8

4 Last Earnings Report Arrow Electronics Tops Q1 Earnings, Lags Revenues Arrow posted mixed first-quarter 2015 results wherein the bottom line surpassed the Zacks Consensus Estimate but the top line missed the same. The company s adjusted earnings of $1.32 per share came a penny ahead of the Zacks Consensus Estimate. Moreover, adjusted earnings registered a year-over-year increase of 8% primarily driven by better cost management and lower share counts. Quarter Ending 03/2015 Report Date Apr 30, 2015 Sales Surprise -1.83% EPS Surprise 0.76% Quarterly EPS 1.32 Annual EPS (TTM) 6.03 Quarter Details Arrow s revenues, on a reported basis, came in at $5.002 billion, down 1.6% from the year-ago quarter. Quarterly revenues also fell short of the Zacks Consensus Estimate of $5.096 billion. However, on an adjusted basis, revenues increased 3.4% year over year. The company s book-to-bill ratio was On a segmental basis, revenues from Global components decreased 2.2% on a year-over-year basis to $3.347 billion. However, on an adjusted basis, Global components revenues increased 1.8%. Revenues from America and Asia-Pacific remained flat year over year, while adjusted European revenues increased 10%. Revenues from Global enterprise computing solutions (ECS) came in at $1.655 billion, almost flat with the year-ago quarter. However, adjusted revenues increased 6.9% from the year-ago quarter primarily due to increased demand for storage, network and industry standard servers. Revenues from America increased 8%. Moreover, adjusted ECS revenues from Europe grew 8%. Gross margin came in at 13.7% compared with 13.8% in the year-ago quarter. Arrow reported adjusted operating margin of 4%, up 20 basis points (bps) from the year-ago quarter, while in dollar terms, operating income increased 2.2% to $199.0 million. Arrow s adjusted net income (excluding the effect of restructuring, gain on sale of investment and amortization) came in at $127.7 million or $1.32 per share compared with $124.1 million or $1.22 in the year-ago quarter. Arrow exited the quarter with cash and cash equivalents of $305.3 million compared with $400.4 million at the end of the previous quarter. Long-term debt (including current portion) was $2.47 billion compared with $2.08 billion at the end of the last quarter. During the first quarter, the company used $241.6 million cash for operational activities and repurchased shares worth $78.6 million. Guidance For the second quarter of 2015, Arrow expects sales between $5.45 billion and $5.85 billion (mid-point $5.65 billion). Global components sales are projected between $3.45 billion and $3.65 billion. Global enterprise computing solutions sales are estimated within $2.0 to $2.2 billion. The company expects non-gaap earnings to range within $1.43 to $1.55 per share (mid-point $1.49). Recent News Arrow Buys ATM Electronic Corporation May 1, 2015 On May 1, Arrow announced the completion of the acquisition of Taiwan-based electronic component distributor, ATM Electronic Corporation. The acquisition is expected to boost its operations in Taiwan and China. Arrow Boosts Federal Market Presence with immixgroup Buy - Mar 31, 2015 Electronic component distributor Arrow Electronics Inc. (ARW - Analyst Report) recently announced that it has completed the acquisition of immixgroup Inc., a value-added reseller of IT solutions. However, the financial terms of the deal have not been disclosed. McLean, VA-based immixgroup distributes value-added IT services and solutions offered by over 250 technology suppliers. Moreover, the company works with 800 public sector channel partners providing IT solutions, especially to government agencies. This move is, therefore, likely to enhance Arrow Electronics presence in the federal market where its sales are meager compared with immixgroup. According to Washington Technology, which quotes data from USAspending.gov, Arrow Electronics sales to federal agencies were approximately $20.8 million in 2014 versus immixgroup s $418.3 million. Thus, the two businesses are highly complementary. Further, Arrow believes that synergies from the acquisition will begin from the first year and expects it to contribute cents to 2015 earnings per share, excluding the impact of the amortization of related intangible assets. Arrow Electronics' ECS Unit Inks Agreement with Splunk Mar 16, 2015 Arrow operating unit Arrow Enterprise Computing Solutions (ECS) recently signed a distribution agreement with Splunk Inc. This will introduce Splunk s wide range of products and services to Arrow s distribution channel database which serves clients across the Zacks Equity Research: ARW Page 4 of 8

5 United States and Canada. Per the agreement, ECS will directly distribute Splunk s real-time infrastructure optimization software to help customers reduce their time to market, lower their total cost of ownership, introduce innovative products through demand creation opportunities and enhance their overall competitiveness. Moreover, the company will be managing and supporting data centers IT and facilities systems by providing a platform with improved operational intelligence. By adding these solutions to its line card offerings in the United States and Canada, Arrow will make the entire infrastructure management of data centers less costly and more efficient for its customers. Splunk offers software platform for real-time operational intelligence. It provides a better business insight regarding IT systems and technology infrastructure, which helps in taking knowledgeable decisions and improves operational efficiencies. Following this distribution deal, resellers and customers will benefit from deeper IT solutions and avail Splunk s products like Hunk: Splunk Analytics for Hadoop, NoSQL Data Stores and Splunk Enterprise to obtain insights from their big data resources. Additionally, Splunk s solutions will help Arrow to enhance its businesses, thereby capturing fast-growing and developing channel opportunities. Arrow Electronics (ARW) Expands ArrowSphere Globally Mar 11, 2015 Arrow recently announced the improvement of its cloud service aggregation and brokerage portal, ArrowSphere. This platform is particularly designed for aggregating, merchandizing and delivering cloud-related services to system integrators, autonomous software dealers and IT service providers all over the world. ArrowSphere through its improved business solutions will help its value-added solution providers to sell several aggregated cloudrelated services, which include infrastructure-, platform-, storage- and software-as-a-service solutions. Arrow via its platform would assist clients to use 90 cloud-based services and will also provide secured single sign-on solutions to its customers. Besides, there is a huge scope for the company to earn additional revenues through this enhancement of the cloud-related portal. Management stated that ArrowSphere through its service channel would help increase the demand for cloud-based services in the coming years. Also, the portal will improve and enhance solution designs for customers and will help in accelerating their growth. Zacks Equity Research: ARW Page 5 of 8

6 Industry Analysis Zacks Industry Rank: 203 / 265 (Bottom 23%) Top Peers AAC TECH HLDGS (AACAY) ACORN ENERGY IN (ACFN) ACTIVE POWER (ACPW) AMETEK INC (AME) AMPHENOL CORP-A (APH) AVNET (AVT) ANIXTER INTL (AXE) WESCO INTL INC (WCC) Industry Comparison Elec Parts Dist Position in Industry: 2 of 4 Industry Peers ARW Market Cap 5.35 B # of Analysts 9 Dividend Yield 0.00% Growth Score Hist. EPS Growth (3-5 yrs) 9.10% Proj. EPS Growth (F1/F0) 4.86% Curr. Cash Flow Growth 15.12% Hist. Cash Flow Growth (3-5 yrs) 21.19% Current Ratio 1.80 Debt/Capital 37.94% Net Margin 2.19% Return on Equity 14.26% Sales/Assets 1.95 Proj. Sales Growth (F1/F0) 1.24% Value Score Cash/Price 0.06 EV/EBITDA 7.52 PEG Ratio NA Price/Book (P/B) 1.33 Price/Cash Flow (P/CF) 6.85 P/E (F1) 8.99 Price/Sales (P/S) 0.24 Earnings Yield 11.13% Debt/Equity 0.61 Cash Flow ($/share) 8.16 Momentum Score Daily Price Chg -1.50% 1 Week Price Chg -0.02% 4 Week Price Chg -3.70% 12 Week Price Chg -8.28% 52 Week Price Chg -9.87% 20 Day Average Volume 531,298 (F1) EPS Est Wkly Chg 0.00% (F1) EPS Est Mthly Chg 0.00% (F1) EPS Est Qtrly Chg -0.07% (Q1) EPS Est Mthly Chg 0.00% X Industry S&P B B % 1.86% % 9.73% -3.07% 6.17% 15.12% 7.04% 15.54% 10.07% % 38.77% 2.64% 9.87% 14.34% 16.82% % 1.74% % 5.39% % -0.09% -0.01% -0.01% -3.70% -1.24% -7.28% -2.82% % 4.31% 445,734 2,294, % 0.00% -0.12% 0.00% -4.85% -0.22% -0.23% 0.00% AVT AXE WCC 5.57 B 2.11 B 3.02 B % 0.00% 0.00% NA 11.44% 18.88% NA % -3.07% 20.72% 1.29% 3.35% 15.54% -0.01% 20.06% NA NA 51.89% 42.12% NA 2.64% 3.43% NA 15.92% 14.34% NA NA % -0.73% NA NA NA NA NA% 6.42% 7.36% % -0.23% -1.14% -0.01% -0.02% -0.04% -4.07% -4.66% -6.44% -7.28% % -0.39% -8.70% % % 0 208, , % -4.05% -0.23% 0.42% -4.05% -0.23% -4.37% % -5.33% 0.20% -3.31% -0.46% Zacks Equity Research: ARW Page 6 of 8

7 Zacks Rank Education The Zacks Rank is calculated from four primary inputs: Agreement, Magnitude, Upside and Surprise. Agreement This is the extent which brokerage analysts are revising their earnings estimates in the same direction. The greater the percentage of estimates being revised higher, the better the score for this component. For example, if there were 10 estimate revisions over the last 60 days, with 8 of those revisions up, and the other 2 down, then the agreement factor would be 80% positive. If, however, 8 were to the downside with only 2 of them up, then the agreement factor would be 80% negative. The higher the percentage of agreement the better. Magnitude This is a measure based on the size of the recent change in the current consensus estimates. The Zacks Rank looks at the magnitude of these changes over the last 60 days. In the chart to the right, the display shows the consensus estimate from 60-days ago, 30-days ago, 7-days ago, and the most current estimate The difference between the current estimate and the estimate from 60-days ago is displayed as a percentage. A larger positive percentage increase will score better on this component. Upside This is the difference between the most accurate estimate, as calculated by Zacks, and the consensus estimate. For example, a stock with a consensus estimate of $1.00, and a most accurate estimate of $1.05 will have an upside factor of 5%. This is not an indication of how much a stock will go up or down. Instead, it's a measure of the difference between these two estimates. This is particularly useful near earnings season as a positive upside percentage can be used to help predict a future surprise. Surprise The Zacks Rank also factors in the last few quarters of earnings surprises. Companies that have positively surprised in the recent past have a tendency of positively surprising again in the future (or missing if they recently missed). A stock with a recent track record of positive surprises will score better on this factor than a stock with a history of negative surprises. These stocks will have a greater likelihood of positively surprising again. Zacks Style Score Education The Zacks Style Score is as a complementary indicator to the Zacks Rank, giving investors a way to focus on the best Zacks Rank stocks that best fit their own stock picking preferences. Academic research has proven that stocks with the best Growth, Value, and Momentum characteristics outperform the market. The Zacks Style Scores rate stocks on each of these individual styles and assigns a rating of A, B, C, D and F. An A, is better than a B; a B is better than a C; and so on. Growth Score Value Score Momentum Score As an investor, you want to buy stocks with the highest probability of success. That means buying stocks with a Zacks Rank #1 or #2, Strong Buy or Buy, which also has a Style Score of an A or a B. Zacks Equity Research: ARW Page 7 of 8

8 Disclosures The analysts contributing to this report do not hold any shares of this stock. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts' personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. Zacks Equity Research: ARW Page 8 of 8