Avnet's Neutral Rating Retained

We continue to maintain a sideline view of Avnet, Inc. (AVT), thereby retaining our Neutral recommendation on the company’s stock.

Avnet has been active in maintaining its pace with regard to strategic acquisitions. Nexicore Services LLC, purchased for increasing logistics at its Texas, Ohio and Georgia centres, was the last major acquisition of the company.

Previously in 2011, we witnessed the acquisitions of J.C. Rally Trading Co. Ltd. and Pinnacle Data Systems Inc. These acquisitions were made by AVT with the primary intent of increasing market share and also enhancing product diversity.

Recently announced, the financial results of first fiscal quarter 2012 reported revenues worth $6.4 billion approximately. The revenues dipped both yearly and sequentially but were within management’s previously provided outlook. The Zacks Consensus Estimate was exceeded by just a penny as the company declared earnings of 90 cents per diluted share. A $500 million share repurchase program was approved by the company’s Board of Directors and it also bought back a total of 3.45 million shares in the particular quarter.

While fierce competition from players like Arrow Electronics Inc. (ARW - Analyst Report) remains ominous for AVT, the macro condition does not seem to be favourable either. Around 62% of revenues came from international operations in 2011 which puts the company in a precarious condition, judging by the pervasive ongoing financial crisis still largely prevalent especially in the EMEA region.

Another major point of concern is the tendency of Avnet to lay emphasis on the Asian and Latin American markets. Although this move appears to be encouraging in terms of cost reduction strategies, it also tends to pull back the overall margins earned primarily for the Technology Solutions division. The three-year margin projections made by the company for this segment currently lie between 3.4% and 3.9% only.

The current Zacks Consensus Estimates for the fiscal years 2012 and 2013 are $3.89 and $4.30, respectively. In the short-run, we have a Zacks #4 Rank for the stock, which translates into a short-term rating of Sell. We currently retain our long-term rating of Neutral for the company.

Read the full analyst report on ARW

Read the full analyst report on AVT