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Zacks Investment Research upgraded Arrow Electronics (ARW - Analyst Report) to a Zacks Rank #1 (Strong Buy) on Sep 5, following impressive second-quarter results.

Why the Upgrade?

Arrow, an electronic component distributor, posted better-than-expected second-quarter results with both earnings and revenues surpassing the Zacks Consensus Estimate. Revenues were positively impacted by higher sales from the Global Enterprise Computing Solutions (ECS) segment, which more than offset the marginal decline in revenues from Global component sales.

The company was also positive about its expense reduction plans, saying that it would be able to reduce costs by $75.0 million, which is a significant improvement from the $40.0 million committed earlier. The company is optimistic about selective investments in long-term opportunities.

Moreover, Arrow recently bought Munich-based Computerlinks for $300 million. The acquisition, expected to close in the fourth quarter of the current fiscal year, will add approximately 20 cents to 25 cents (excluding the impact of amortization of related intangible assets) to Arrow’s earnings per share for the year.

The acquisition would also help Arrow gain traction in the emerging data center market. Additionally, the product portfolio of Computerlinks will enhance Arrow’s ECS offerings. Arrow’s ECS has partnerships with many companies such as Check Point, Juniper (JNPR - Analyst Report) and International Business Machines, and provides varied products and services related to security and networking to its clients.

However, the company provided tepid third-quarter guidance, reflecting macro concerns. Nonetheless, its positive commentary about enhanced productivity, annual cost savings and successful ERP implementation across Europe is encouraging. We believe that Arrow could get better contribution from Europe as soon as the ERP program becomes operational.

Other Stocks to Consider

Besides Arrow Electronics, other stocks with favorable Zacks Ranks are Micron Technology (MU - Analyst Report) and SanDisk Corp (SNDK - Analyst Report). Both the stocks carry a Zacks Rank #1 (Strong Buy).

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