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Can Recovery in Farnell Accelerate Avnet's Margin Expansion?
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Key Takeaways
AVT's Farnell sales rose 24% year over year in Q3, marking a third straight quarter of growth.
Farnell posted a 5.2% operating margin, up 55 bps sequentially, reaching its highest level in three years.
AVT expects Farnell's operating margins to gradually improve and return to double-digit growth by 2027.
Avnet Inc. (AVT - Free Report) is seeing steady improvement in its Farnell business, which is driving the company's overall profitability. Revenues from the Farnell segment increased 24% on a year-over-year basis and 6% on a sequential basis in the third quarter of fiscal 2026. This marked the third consecutive quarter of double-digit year-over-year sales growth in the Farnell segment. Improving demand conditions and better product mix are the key factors that supported Farnell’s recovery during the third quarter.
Farnell’s margins are also improving consistently. In the third quarter, Farnell reported an operating margin of 5.2%, expanding 55 basis points (bps) on a sequential basis. This was Farnell’s highest operating margin level in three years and marked the sixth straight quarter of operating margin expansion. Higher sales of on-board components helped Farnell's gross margin expand 34 bps on a year-over-year basis and 49 bps on a sequential basis.
AVT believes Farnell still has room for additional improvement. The management stated that its Farnell business remains on track to return to double-digit operating margins by the second half of 2027. The company also expects Farnell’s operating margins to improve gradually over the next several quarters as Europe recovers further and demand trends strengthen. Europe remains Farnell’s largest region, where the company is seeing a gradual improvement in business conditions.
The company is also investing in Farnell’s long-term growth. In the third quarter, management highlighted investments in e-commerce platforms, customer experience and inventory capabilities. Further, inventory correction trends appear to be largely behind the business, while order activity and revenue per line item are improving, all of which bodes well for Farnell's prospects. If Farnell continues delivering sales growth and margin expansion, the recovery in the Farnell segment could become a larger contributor to AVT’s overall profitability in the coming quarters.
How Competitors Fare Against Avnet
Avnet faces stiff competition from other global technology solutions providers, such as Arrow Electronics Inc. (ARW - Free Report) and TD SYNNEX (SNX - Free Report) .
Arrow Electronics is one of the world’s largest distributors of electronic components, which focuses on selling semiconductor products, IP&E components and IT hardware and software to original equipment manufacturers and electronics manufacturing services providers. ARW’s consolidated non-GAAP gross margin in the first quarter of fiscal 2026 was 11.5%, which expanded 20 bps on a year-over-year basis. The non-GAAP operating margin expanded 160 bps year over year to 4.2%.
TD SYNNEX is a leading global IT distributor and solutions aggregator, providing a comprehensive range of technology distribution, logistics and integration services. SNX’s first-quarter fiscal 2026 gross profit increased 25.5% year over year to $1.25 billion, whereas the gross margin expanded 40 bps to 7.3%. The non-GAAP operating margin expanded by 70 bps on a year-over-year basis to 3.4%.
AVT’s Price Performance, Valuation & Estimates
Shares of AVT have surged 73% in the year-to-date period compared with the Zacks Electronics - Parts Distribution industry’s appreciation of 62.8%.
AVT YTD Price Return Performance
Image Source: Zacks Investment Research
In terms of forward price/sales, Avnet is trading at 0.25X compared with the industry’s 0.4X.
AVT Forward 12 Months (P/S) Valuation
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for Avnet’s fiscal 2026 earnings is pegged at $5.12 per share, revised up by 20 cents over the past seven days, marking a year-over-year increase of 48.8%.
View the Zacks #1 Rank List
Image: Bigstock
Can Recovery in Farnell Accelerate Avnet's Margin Expansion?
Key Takeaways
Avnet Inc. (AVT - Free Report) is seeing steady improvement in its Farnell business, which is driving the company's overall profitability. Revenues from the Farnell segment increased 24% on a year-over-year basis and 6% on a sequential basis in the third quarter of fiscal 2026. This marked the third consecutive quarter of double-digit year-over-year sales growth in the Farnell segment. Improving demand conditions and better product mix are the key factors that supported Farnell’s recovery during the third quarter.
Farnell’s margins are also improving consistently. In the third quarter, Farnell reported an operating margin of 5.2%, expanding 55 basis points (bps) on a sequential basis. This was Farnell’s highest operating margin level in three years and marked the sixth straight quarter of operating margin expansion. Higher sales of on-board components helped Farnell's gross margin expand 34 bps on a year-over-year basis and 49 bps on a sequential basis.
AVT believes Farnell still has room for additional improvement. The management stated that its Farnell business remains on track to return to double-digit operating margins by the second half of 2027. The company also expects Farnell’s operating margins to improve gradually over the next several quarters as Europe recovers further and demand trends strengthen. Europe remains Farnell’s largest region, where the company is seeing a gradual improvement in business conditions.
The company is also investing in Farnell’s long-term growth. In the third quarter, management highlighted investments in e-commerce platforms, customer experience and inventory capabilities. Further, inventory correction trends appear to be largely behind the business, while order activity and revenue per line item are improving, all of which bodes well for Farnell's prospects. If Farnell continues delivering sales growth and margin expansion, the recovery in the Farnell segment could become a larger contributor to AVT’s overall profitability in the coming quarters.
How Competitors Fare Against Avnet
Avnet faces stiff competition from other global technology solutions providers, such as Arrow Electronics Inc. (ARW - Free Report) and TD SYNNEX (SNX - Free Report) .
Arrow Electronics is one of the world’s largest distributors of electronic components, which focuses on selling semiconductor products, IP&E components and IT hardware and software to original equipment manufacturers and electronics manufacturing services providers. ARW’s consolidated non-GAAP gross margin in the first quarter of fiscal 2026 was 11.5%, which expanded 20 bps on a year-over-year basis. The non-GAAP operating margin expanded 160 bps year over year to 4.2%.
TD SYNNEX is a leading global IT distributor and solutions aggregator, providing a comprehensive range of technology distribution, logistics and integration services. SNX’s first-quarter fiscal 2026 gross profit increased 25.5% year over year to $1.25 billion, whereas the gross margin expanded 40 bps to 7.3%. The non-GAAP operating margin expanded by 70 bps on a year-over-year basis to 3.4%.
AVT’s Price Performance, Valuation & Estimates
Shares of AVT have surged 73% in the year-to-date period compared with the Zacks Electronics - Parts Distribution industry’s appreciation of 62.8%.
AVT YTD Price Return Performance
Image Source: Zacks Investment Research
In terms of forward price/sales, Avnet is trading at 0.25X compared with the industry’s 0.4X.
AVT Forward 12 Months (P/S) Valuation
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for Avnet’s fiscal 2026 earnings is pegged at $5.12 per share, revised up by 20 cents over the past seven days, marking a year-over-year increase of 48.8%.
Image Source: Zacks Investment Research
Avent currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.