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Analyst Blog

On Jun 13, 2014, we issued an updated research report on Arrow Electronics Inc. (ARW - Analyst Report) following the company’s mixed first-quarter 2014 results, wherein the bottom line surpassed the Zacks Consensus Estimate while the top line lagged the same.

Notably, both earnings and revenues improved on a year-over-year basis driven by growth across its business segments and geographies. Revenues from Global components and Global enterprise computing solutions (ECS) increased 7.2% and 0.2%, respectively on a year-over-year basis.

Arrow has been very active on the acquisition front. During 2013, the company completed the acquisition of four companies in addition to the Computerlinks acquisition. We believe that these acquisitions are likely to enable Arrow to enter markets, diversify and broaden its product portfolio and maintain its leading position. This should also have a positive impact on Arrow’s top line, going forward.

Arrow’s core strength of providing best-in-class services is expected to bolster its 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. We believe that its expertise in understanding market dynamics and strong product portfolio will continue to support growth.

Spending on electronic components and computer products is highly dependent on overall IT spending. Per the U.S. research firm Gartner, overall IT spending is expected to grow 3.1% in 2014. The improvement in spending will mostly be driven by enterprise software and IT services. We believe Arrow is well-positioned to capitalize on the opportunity.

Apart from this, Arrow has returned cash through share repurchases. On May 21, 2014, the company announced the buyback of an additional $200 million worth of its common stock under a new share repurchase program. During the first three months of fiscal 2014 (ending Mar 29, 2014), the company repurchased stocks worth $88.5 million. These initiatives are expected to support the company’s bottom line going forward.

However, on the downside, Arrow has a highly leveraged balance sheet. The company exited the first quarter with cash and cash equivalents of $258.3 million compared with $390.6 million in the previous quarter. Long-term debt was $2.14 billion. Thus, a highly leveraged balance sheet weakens the company's earnings growth prospects.

Going forward, uncertain economic conditions and competition from Avnet (AVT - Analyst Report) and Ingram Micro (IM - Analyst Report) are concerns.

Currently, Arrow has a Zacks Rank #3 (Hold). A better-ranked stock worth considering in the sector is Micron Technology Inc. (MU - Analyst Report), carrying a Zacks Rank #2 (Buy).

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