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Why Is Arrow Electronics (ARW) Down 2% Since Last Earnings Report?

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A month has gone by since the last earnings report for Arrow Electronics (ARW - Free Report) . Shares have lost about 2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Arrow Electronics due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Arrow Reports Q4 Results

Arrow reported healthy fourth-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 per share (EPS) of $2.57 outpaced the Zacks Consensus Estimate of $2.56, and increased 2.4% from the year-ago quarter.

The company’s adjusted revenues were $7.92 billion, up 5% from the year-ago quarter on a reported basis, and 7% on an adjusted basis. The top line also narrowly beat the consensus estimate of $7.91 billion.

The company faced foreign currency headwinds amounting to $107 million on sales and 6 cents on EPS during the quarter, which has been adjusted in the calculations along with adjustments for acquisitions.

The company benefitted from expanding customer base. Arrow believes that its diverse portfolio spread across various regions globally insulates it against any unfavorable economic conditions, such as currency fluctuations.

Segmental Details

Adjusted revenues from Global Components increased 6% to $5.26 billion. Geographically, the segment’s revenues from the Americas increased 5% and revenues from Asia-Pacific climbed 7% year over year. Global components contribution from Europe rose 9% on a reported basis, and 13% on an adjusted basis.

Adjusted revenues from Global Enterprise Computing Solutions (ECS) came in at $2.66 billion, up 2% year over year on a reported basis and 6% on an adjusted basis. ECS revenues from the Americas were up 4% on a reported basis, and 9% on an adjusted basis.  However, sales from Europe decreased 1% reportedly but were flat year over year as adjusted.

The Global Components segment gained from design activity, up year over year.  Asia displayed the strongest growth in design activity despite the ongoing slowdown, with most of the demand coming from manufacturing customers. In the Americas, demand from industrial, aerospace and defence customers remained high.

In November last year, Arrow expanded its agreement with Cree, Inc.’s Wolfspeed division, with which the former became the latter’s largest global distributor for its silicon carbide and gallium nitride-based technologies. This agreement expands technology options available to Arrow’s customers.

The company has more than 200,000 customers in its portfolio and no customer accounts for more than 2% of revenues. This, we believe, negates any customer concentration risk for Arrow.

Management is optimistic about the increasing cross enterprise engagements, which are expected to continue boosting margins.

Book-to-bill was 0.95 for the quarter, up $100 million from the prior-year quarter.

Margins

Gross profit increased 5% from the previous year to $975.37 million.

Arrow’s non-GAAP operating income was up 5.2% year over year to $356.5 million. Non-GAAP operating margin of 4.5% was flat.

Balance Sheet and Cash Flow

Arrow exited the quarter with cash and cash equivalents of $509.33 million compared with $474.19 million in the previous quarter.

Long-term debt was $3.2 billion compared with $3.4 billion at the end of the previous quarter.

During the quarter, the company’s cash flow from operations was $263.13 million compared with $494.4 million in the third quarter.

In the fourth quarter, Arrow returned approximately $150 million to shareholders through stock repurchase program. Recently, it also approved an additional $600 million of repurchases, and was left with approximately $729 million of authorization at the end of the year.

Full-Year 2018 Highlights

Arrow’s revenues were $29.68 billion, up 12% year over year.

Adjusted EPS came at $8.83 per share compared with $7.51 in 2017.

Guidance

For the first quarter of 2019, sales are expected between $6.775 billion and $7.175 billion.

Global components sales are projected in the range of $4.975-$5.175 billion. Global ECS sales are estimated to be $1.8-$2 billion.

Interest expenses will presumably be about $58 million, as a result of which, the company projects non-GAAP earnings per share in the range of $1.84-$1.96. Average non-GAAP tax rate around the higher end of the 23.5-25.5% range is included in the guidance.

Foreign currency headwind of approximately $160 million on sales and 8 cents on earnings per share is expected to be an overhang in the first quarter.

Profitability improvement activities for the ECS, which was undertaken during the fourth quarter, are expected to continue in the first quarter and the rest of 2019.

Arrow witnessed some weakness in bookings in Asia during the fourth quarter, which has started to pick up pace, and is expected to stabilize in the first quarter of 2019.
 

How Have Estimates Been Moving Since Then?

Fresh estimates followed an upward path over the past two months.

VGM Scores

At this time, Arrow Electronics has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, 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.

Outlook

Arrow Electronics has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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