Avnet (AVT) Q3 Earnings Beat, Revenues Miss, View Soft

Avnet Inc. (NYSE:AVT) reported third-quarter fiscal 2017 results wherein earnings surpassed the Zacks Consensus Estimate but revenues missed the same. The company reported third-quarter adjusted earnings of 88 cents per share, beating the Zacks Consensus Estimate by a couple of cents.

Moreover, adjusted earnings were 7 cents higher than the year-ago quarter. The adjusted figure excludes restructuring, integration and other charges, and amortization of intangible assets.

Before delving into the financial results, it should be noted that Avnet has been taking major restructuring steps to primarily focus on the EM business. In doing so, the company completed the divesture of its Technology Solutions business to Tech Data Corporation (NASDAQ:TECD) for approximately $2.645 billion.

Notably, shares of the company declined more than 8%, yesterday, primarily due to tepid fourth-quarter and fiscal 2018 revenue guidance. Also, lower-than-expected revenues for the third quarter impacted the share price.

Avnet’s share price underperformed the Zacks Categorized Electronics Parts Distributionindustry in the last one year. While the industry gained 16.96%, the stock lost 0.63%.

Quarter Details

The company’s quarterly adjusted revenues of $4.442 billion missed the Zacks Consensus Estimate of $4.453 billion. Revenues were within the management’s guidance of $4.30 billion to $4.6 billion (mid-point $4.45 billion).

However, on a year-over-year basis, revenues witnessed an 8.8% increase. On a constant currency basis, revenues were up 10.6% year over year. The company’s quarterly revenues mainly benefited from the newly acquired Premier Farnell business.

Adjusted operating income increased 6.8% from the year-ago quarter to $172.3 million, mainly due to growth in EMEA and Premier Farnell acquisition. Adjusted operating margin was 3.9% compared with 4% in the year-ago quarter, primarily due to higher operating expenses.

Adjusted net income amounted to $114.3 million, or 88 cents per share, compared with $107.1 million, or 81 cents per share, in the year-ago quarter.

Avnet exited the quarter with cash and cash equivalents of $1.129 billion compared with $1.270 billion in the previous quarter. Long-term debt was $1.724 billion. During the nine months ended Apr 1, fiscal 2017, the company generated $140.5 million of cash from operational activities.

Avnet paid a dividend of 18 cents worth $23.1 million during the quarter. Avnet repurchased 3.1 million shares worth $140.1 million during the said quarter and has $534.8 million remaining under the current share repurchase authorization program.

Guidance

The company provided its outlook for the fourth quarter of fiscal 2017 and fiscal 2018, which only includes EM and the newly acquired Premier Farnell businesses.

For fourth quarter, the company projects sales in the range of $4.35–$4.65 billion (mid-point $4.5 billion). Currently, the Zacks Consensus Estimate is pegged at $4.5 billion.

Adjusted earnings per share are expected in the range of 72–82 cents. The tax rate is likely to be in the 22–26% band.

For fiscal 2018, the company projects sales in the range of $17.3–$17.7 billion (mid-point $17.5 billion). Currently, the Zacks Consensus Estimate is pegged at $17.79 billion.

Adjusted earnings per share are expected in the range of $3–$3.5 per share. The tax rate is likely to be in the 22–26% band.

Our Take

Avnet posted mixed third-quarter results and issued not-so-encouraging revenue guidance.

The divestment of the Technology Solution division will allow Avnet to focus on high-growth areas such as marketing electronic components and related products in the supply chain. The company intends to use its resources to make investments in embedded solutions, IoT and critical digital platforms as well as expand its footprint in newer markets.

In Oct 2016, Avnet completed the much-awaited acquisition of Premier Farnell plc in a total cash deal worth approximately £691 million. U.K.-based Premier Farnell is engaged in the distribution of technology products and solutions, particularly engineering solutions to the electronic system design, maintenance and repair communities.

With its business spread across Europe, North America and Asia Pacific regions, the company operates in about 36 countries. The company believes that the acquisition will strengthen its worldwide digital footprint.

In our opinion, the acquisition will strategically fit with Avnet’s policy of focusing on high growth electronic component business.

Nonetheless, a significant portion of Avnet’s revenues comes from the sale of semiconductors, which is a cyclical industry, characterized by changes in technology and manufacturing capacity and subject to significant market upturns and downturns. Intensifying competition from Arrow Electronics Inc. (NYSE:ARW) also remains a headwind.

Currently, Avnet has a Zacks Rank #3 (Hold). A better-ranked stock worth considering in the Computer-Software industry is Micron Technology, Inc. (NASDAQ:MU) , which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Micron has an expected long-term EPS growth rate of 10%.

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