Outperform on Avnet - Analyst Blog

We continue to maintain our OUTPERFORM recommendation on Avnet, Inc. (AVT), one of the world's largest distributors of electronic components and computer products, based on solid growth expected in fiscal 2011.
 
Avnet revived its business quite well in fiscal 2010 after a disastrous 2009, driven by strong global demand. Business began to recover in the first quarter of fiscal 2010 as end-demand improved and participants began to realize inventory in the technology supply chain at unsustainably low levels. This propelled growth for the rest of fiscal 2010.
 
Revenue for the fourth quarter of fiscal 2010 grew 38.5% year over year driven by strong recovery in technology markets. The Electronics Marketing (EM) Group reported a 47% y/y growth in revenue driven by revival of demand. The economic recovery that started in Asia is now spreading to other regions as well.
 
The Technology Solutions (TS) Group reported a 27.5% y/y growth in revenue driven by solid growth in servers, storage and networking products. In particular, growth has resumed in the EMEA region after a long recession.
 
Margins also continue to show improvement. As revenue declined in fiscal 2009, margins took a beating. Hence, management initiated a series of actions, which reduced operating expenses by $225 million on an annual basis in addition to cost synergies related to acquisitions. Margins are expected to improve further as revenue grows. Avnet expects 2011 to be stronger than 2010 in terms of business and expects to generate at least a 12.5% return on capital employed.
 
Avnet provided strong guidance for the first quarter of fiscal 2011. Management projects revenue between $5.60 billion and $6.20 billion for the first quarter of 2011, expecting a sequential growth of 8% – 19.0%. The sequential growth should be driven by the recent acquisitions. In July, Avnet completed three acquisitions – Bell Microproducts with operations in the Americas and EMEA, Tallard Technologies in Latin America, and Unidux in Japan.
 
Avnet is currently integrating Bell into its operating groups. Avnet retired Bell's high interest rate debt and launched a tender offer to retire its convertible notes. The company now expects synergies to be $60 million per year, at the high end of its initial range of $50 million to $60 million.
 
Revenue is back to the pre-recession levels and Asia continues to contribute the larger portion of the total. Given the early signs of recovery, IT spending is expected to pick up. Although the recovery would be slow and steady, orders are expected to return to normal levels by the end of calendar 2010. The recent acquisition of Bell Microproducts should further expand the scale of operations and provide cross-selling opportunities.
 
Our Outperform recommendation is supported by a Zacks #1 Rank, which translates to a short-term rating of Strong Buy. We also have an Outperform recommendation on rival Arrow Electronics Inc. (ARW).

 
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