Remain Neutral on Avnet

We reiterate our Neutral recommendation on Avnet, Inc. (AVT - Analyst Report). A proactive stance on acquisitions and incipient buy-back activities could only partially counteract effects of short-term downsides, over-emphasis on foreign markets and ominous competition.

Avnet has retained a keen eye out for making profitable acquisitions for market proliferation and technological advancements. Till date, in its fiscal 2012, the company has successfully bought nine businesses with consolidated annualized revenues of about $730 million.

The major acquisition of Nexicore Services LLC was completed on April 4, 2012. Not long back, on March 26, 2012, the company also announced its decision to acquire Ascendant Technology LLC., mainly to expand its global solutions distribution model.

One aspect which has forever been impressive with Avnet is its desire to return optimum value to its shareholders through buy back. On August 10, 2011, Avnet launched a $500 million share repurchase program under which it bought back 710,000 shares during its third fiscal quarter of 2012. Fiscal fluctuations or pressurized yields apart, the company never disappoints its investors in this regard.

While its intent and advances towards meeting long-term targets are much approbatory, fears linger in our minds with regard to the company’s disregard for fighting short-term downsides. Revenues dropped pervasively across both segments and even though major cost reduction strategies were able to lift margins to satisfactory levels; this might not be possible to sustain in the upcoming quarter if demand continues to deteriorate at a similar pace.

Avnet’s offshore markets are raising mounting concerns incipiently with time. It is quite ironic that with such a laudatory market presence across geographic regions it is becoming an onus for Avnet today.

Firstly, the EMEA’s fiscal downfall continues to mar performances at every sector. Avnet is no exception here with its vast operations across Europe. There is hardly any sign of recovery from this region in the near time ahead.

Secondly, the company has been making advances at emerging economies, Asia being the prime center of attention. Avnet should take note of the fact that while this shall bolster cost reduction strategies using cheap labor, this might also prevent Avnet from achieving higher margins with its higher asset velocity expectations from these regions and low-margin businesses.

Fierce competition prevails in the industry Avnet pertains to including big players with proactive advances just like its own. Companies to remain wary of at all times are Anixter International Inc. (AXE - Snapshot Report), Richardson Electronics Ltd. (RELL - Snapshot Report) and Wesco International Inc. (WCC - Analyst Report).

Hence, until the situation ameliorates and a brighter picture appears on the cards, we consider it wise to maintain a sideline stance on Avnet. In the short run, we have a Zacks #3 Rank on the stock which translates into a short-term ‘Hold’ rating.