It has been about a month since the last earnings report for Arrow Electronics (ARW - Free Report) . Shares have added about 9% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Arrow Electronics due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Arrow Reports Q3 Results
Arrow Electronics reported healthy third-quarter 2018 results. Both the top and bottom lines beat the Zacks Consensus Estimate and improved on a year-over-year basis.
Arrow’s non-GAAP earnings of $2.18 per share outpaced the Zacks Consensus Estimate of $2.16and increased 19.8% from the year-ago quarter.
The company’s adjusted revenues were $7.49 billion, up 9.2% from the year-ago quarter. The top line also surpassed the consensus estimate of $7.38 billion.
The company’s focus on expanding engineering services and working capital to offer more complete solutions was reflected in its revenues. Arrow believes that its diverse portfolio spread across various regions globally insulates it against any unfavorable economic conditions such as currency fluctuations.
Adjusted revenues from Global Components increased 10.9% to $5.38 billion. Geographically, the segment’s revenues from the Americas increased 12.3% and revenues from Asia climbed 7.8% year over year. Global components contribution from Europe rose approximately 13.1%.
Adjusted revenues from Global Enterprise Computing Solutions (ECS) came in at $2.11 billion, up 9.2% year over year. ECS revenues from the Americas were up 12.9% while that from Europe increased 1.7%.
The Global Components segment gained from design activity, which showed year-over-year growth of 15%. In the Americas, demand from industrial manufacturing and manufacturing customers during the quarter remained high. For Asia, the key growth drivers were transportation and IoT.
Among the various notable milestones achieved by the company this quarter was the expansion of its association with leading wireless carriers on industry-specific digital transformation solutions. With this, Arrow intends to tap the opportunities presented by 5G, artificial intelligence (AI), IoT etc. in various industries such as manufacturing, retail, finance, healthcare and the public sector.
During the quarter, Arrow continued to expand its efforts in AI by announcing the 2019 opening of its test center for edge computing and AI-based solutions — the Colorado Open Lab.
Moreover, the company announced that it is teaming up with Intel (INTC) to launch Ambient Science, an IEEE global edge-computing standard, which is going to be showcased at Colorado Open Lab. The lab will serve as the proving ground for the new infrastructure.
In an attempt to fortify its foothold further in the booming AI space, Arrow has partnered with NVIDIA (NVDA) to work on the latter’s AI computing platform — Jetson Xavier — to deliver advanced AI computing.
Management is optimistic about the increasing cross enterprise engagements, which are expected to continue boosting margins.
However, even though the backlog showed year-over-year increase, growth rate was slow, per the company’s expectations. Book-to-bill was 1.03 for the quarter, down from 1.07 in the prior-year quarter. This was because of lower demand for long-duration orders.
Gross profit increased 9.6% from the previous year to $923.78 million.
Arrow’s non-GAAP operating income was up 19% to $314.12 million. Non-GAAP operating margin of 4.2% was up 30 basis points.
Balance Sheet and Cash Flow
Arrow exited the quarter with cash and cash equivalents of $474.19 million compared with $330.5 million in the previous quarter.
Long-term debt was $3.4 billion compared with $3.7 billion at the end of the previous quarter.
During the quarter, the company’s cash flow from operations was $494.4 million compared with an outflow of $410 million a year ago.
For the fourth quarter of 2018, sales are expected between $7.7 billion and $8.1 billion.
Global components sales are projected in the range of $5.18-$5.38 billion. Global ECS sales are estimated to be $2.53-$2.73 billion.
Interest expenses will presumably be about $57 million as a result of which the company projects non-GAAP earnings per share in the range of $2.46-$2.62. Average non-GAAP tax rate of 23.5-25.5% is included in the guidance.
The company also expects the demand for Global Components and growth in the engineering business to continue in the fourth quarter.
However, the company expects a decline in the ECS segment in the fourth quarter, post which, sustained growth is expected.
How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months.
Currently, Arrow Electronics has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Arrow Electronics has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.