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On Apr 2, we upgraded electronic components and computer products distributor, Avnet Inc. (AVT - Analyst Report) to Neutral based on a decent second quarter performance despite macroeconomic uncertainty, weak PC demand and inventory rebalancing, and synergies from recent acquisitions. Avnet carries a Zacks Rank #3 (Hold).

Why the Upgrade?

Avnet’s second quarter 2013 earnings per share came in at $1.01, surpassing the Zacks Consensus Estimate by 21.7%. Revenues were roughly flat year over year at $6.70 billion but were much above the Zacks Consensus Estimate of $6.25 billion. Over the past four quarters, Avnet has delivered an average surprise of 6.4%.

Following the release of second quarter results, the Zacks Consensus Estimate for 2013 went up 3.6% to $3.46 per share. Moreover, the Zacks Consensus Estimate for 2014 also moved up 2.7% to $4.24 per share.

Reasons for the Positive Bias on the Company

Though guidance for the upcoming quarter was disappointing, we see some positive factors that led to the upgrade.

Avnet agreed to acquire Hong Kong-based value-added distributor, RTI Holdings Ltd. along with its three associate companies (RTI Technology China Ltd, Eastele Technology China Ltd, and DSP Solutions Ltd). Post closure of the acquisition, Avnet will integrate the new division into its Electronics Marketing segment as RTI’s offerings will compliment the segment’s flagships. With RTI Holdings, Avnet will be able to boost its product portfolio and extend its geographical reach in Asia (mainly in China).

Also, the tech distributor added California-based IT professional services company, TSSLink Inc. in January, to strengthen its Technology Solutions segment.

The acquisitions are expected to be accretive to earnings per share as soon as they are wrapped up.

In February, Avnet announced to have secured a place in Fortune magazine's 2013 “World's Most Admired Companies” list. The magazine recognized Avnet as the leading Electronics Wholesaler for the fifth consecutive time.

Apart from this, British semiconductor and software design company, ARM Holdings plc and Texas Memory Systems Inc., a subsidiary of IBM Corp. (IBM - Analyst Report) selected Avnet as their distribution partner.

Other Stocks to Consider

Besides Avnet, other stocks in the technology sector that are currently performing well include Rambus Inc. (RMBS - Snapshot Report) and Lattice Semiconductor (LSCC - Snapshot Report). Both these companies carry a Zacks Rank #1 (Strong Buy).

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