Avnet (AVT) Down 13.5% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Avnet (AVT). Shares have lost about 13.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Avnet due for a breakout? 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 catalysts.

Avnet's Q2 Earnings Miss, Revenues Beat Mark

Avnet recently reported second-quarter fiscal 2020 results wherein the bottom line missed estimates but the top line beat the same.

Its non-GAAP earnings were 40 cents per share, lagging the consensus estimate by 2.4%. The metric also plunged 61.5% year over year.

Revenues of $4.5 billion surpassed the Zacks Consensus Estimate by 2.3% but decreased 10% year over year. Nonetheless, the top line came within the company’s guided range of $4.2-$4.6 billion.

Persistent weakness in the components industry due to macroeconomic woes hurt the top line. Softness in the industrial and automotive segments due to the downturn in Asia was further aggravated by the headwinds from Europe. Moreover, shorter lead times and lower average selling prices induced higher-than-expected pricing and margin pressures in the Farnell business, affecting the bottom line.

However, pricing stabilized as the quarter progressed. Strong performance in the vertical markets of defense and aerospace and new opportunities in retail and healthcare were positives. This industrial sector started to witness a rebound after a lull, which was an upside.

Quarter in Detail

Electronic Components segment fell 10.2% year over year to $4.2 billion due to the demand correction that began in December 2018.

Revenues from the Americas declined 8.8% year over year. However, revenues appear to be stabilizing, indicating that the downfall in the semiconductor space is bottoming out.

Revenues from the EMEA region were down 14.6%, particularly due to weakness in Europe.

Further, Asia revenues dipped 1.1% year over year due to macroeconomic issues. However, after a recent macroeconomic slowdown, revenues from Asia displayed stabilizing trends.

Purchasing Manager Index (PMI), which should exceed 50 to indicate industrial expansion, showed signs of stabilization in the United States and Asia toward the end of the quarter.

Premier Farnell segment’s revenues of $331 million dropped 10.1% year over year. Nonetheless, the construction of a new Farnell distribution facility in Europe was a positive. SKU expansion is also making a steady progress, which is expected to boost this segment. Moreover, e-commerce global order penetration witnessed a significant increase.

During the quarter, Avnet completed the acquisition of software and embedded systems provider Witekio in a bid to expand and enhance its end-to-end IoT strategy. Witekio’s solutions help developers address the challenges that crop up while developing IoT solutions. This is expected to add more capabilities in terms of embedded software, edge computing and security to Avnet’s IoT business. The deal will also bolster Avnet’s focus on simplifying the process of launching IoT products for client companies besides time and cost efficiently.

The company began to deploy PayPal in Europe, and WeChat Pay, Ali Pay and Union Pay in China to simplify business processes between Avnet and customers.

Avnet also saw lower revenues from Texas Instruments due to the ending of their 40-year distribution partnership in the previous reported quarter.

Margins

Avnet reported gross profit of $525.6 million, down 16.6% year over year. Gross margin shrank 90 basis points (bps) to 11.6%, primarily due to dwindling revenues and contracting margins in Farnell as well as global pricing pressures.

Adjusted operating income was $82.2 million, plunging 54% year over year. Adjusted operating margin came in at 1.8%, down 170 bps.

Adjusted operating expenses increased primarily due to a reserve for a potential bad debt from one customer.

However, focus on cost-reduction efforts was a boon, leading to $50 million in savings during the quarter.

Balance Sheet and Cash Flow

Avnet exited the fiscal second quarter with cash and cash equivalents of $488.8 million compared with $664.1 million recorded sequentially.

Long-term debt was $1.19 billion, same as the prior reported quarter.

The company returned $109 million to its shareholders in the form of $88 million as repurchased shares and $21 million worth of dividend.

Cash flow of $149 million was generated in the quarter.

Guidance

For third-quarter fiscal 2020, the company estimates sales in the range of $4.1-$4.5 billion with mid-point being $4.3 billion.

Non-GAAP earnings per share are estimated in the range of 38-48 cents with mid-point at 43 cents.

Market pressures are expected to persist in the near term. Avnet estimates operating margins at Farnell to lie below 10% in the forthcoming quarters.

Assuming modest improvement in the macro environment for both EMEA and Americas, management anticipates Electronic Components segment’s operating margins between 2.2% and 2.5% by this summer.

Avnet expects to replace the Texas Instruments revenues with higher margin revenues by the end of fiscal 2022.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -15.81% due to these changes.

VGM Scores

Currently, Avnet 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision has been net zero. It's no surprise Avnet has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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