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Analyst Blog

On Mar 28 2014, we issued an updated research report on Avnet Inc. (AVT - Analyst Report). Avnet had earlier delivered better-than-expected quarterly results, topping the Zacks Consensus Estimate on both counts primarily driven by organic growth across its business segments.
Notably, revenues also improved in the first six months of fiscal 2014. Resurgent demand across geographies (the Americas, EMEA and Asia) was responsible for the 9.5% increase in revenues.

Moreover, Avnet’s revenues are dependent on overall IT spending. Per U.S. research firm Gartner, overall IT spending is expected to grow 3.1% in 2014. These predictions bode well with the company’s Technology Solutions segment deriving revenues from the distribution of enterprise computing servers and systems, software, storage and related services.

Separately, Avnet’s restructuring initiatives and share buyback plans are expected to support the company’s bottom line. Avnet has inked a number of distribution deals with several technology providers, which are expected to expand its product portfolio. This will drive top line growth, going forward.

Moreover, synergies from the strategic acquisitions are also expected to positively impact the company’s results going forward. Avnet’s recent acquisitions are targeted toward expanding its international business, with particular focus on Europe, the Middle East and Asia. These acquisitions are expected to bolster its performance and augment its product base and operational network, going forward.

On the flip side, Avnet’s domestic and foreign operations are subject to significant competitive pressures. It faces stiff competition from Arrow Electronics Inc. (ARW - Analyst Report), which remains a formidable rival. Moreover, 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 is subject to significant market upturns and downturns.

Moreover, International Business Machines (IBM - Analyst Report) had been significantly contributing to Avnet’s revenues (12% of total revenue in fiscal 2013). Now that IBM has sold its x86 server business, which accounted for 5% to 6% of Technology Solution revenues, to Lenovo, overall revenues could be impacted if Lenovo discontinues Avnet’s distribution services.

Nonetheless, we remain encouraged by management’s decision to optimize costs and investments to align the business with changing demand.

Currently, Avnet carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

A better-ranked stock worth considering in the sector is Ingram Micro (IM - Analyst Report),carrying a Zacks Rank #2 (Buy).

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