Strong Quarter for Avnet - Analyst Blog

Avnet Inc. (AVT) reported revenues of $4.83 billion in the second quarter fiscal 2010, an increase of 13.2% year over year and 10% excluding the impact of changes in foreign currency exchange rates. On a pro forma (organic) basis, revenue was up 9.6% over the prior-year quarter.

On a segment basis, Electronics Marketing (EM) reported sales of $2.52 billion, up 11.0% year over year. On an organic basis, EM revenue increased 5.1% year over year as the recovery in the electronic component markets accelerated this quarter. Management stated that although Asia has been consistently strong over the past couple of quarters, there are indications that the industrial markets in the Americas and EMEA are returning to growth.

Technology Solutions (TS) reported sales of $2.32 billion in the reported quarter, up 15.8% year over year. On an organic basis, TS revenue was up 15.0% year over year. All three regions grew more than 30% sequentially, led by the Americas region with a sequential growth of 40%. Proprietary servers outgrew industry standard servers this quarter and were up year over year for the first time since March 2008. Also, it seems that with the capital markets improving and the installed equipment base aging, customers are now committing new IT investments.

During the quarter, Avnet added Cisco Systems (CSCO) as a new strategic supplier partner in North America. Management expects that the acceleration of growth at TS along with EM indicates that end-demand is growing as the economy recovers and inventories throughout the supply chain appear to be lean and well managed.

Gross margin came in at 11.4%, down 108 basis points year over year due to a combination of business mix, regional mix and lower margins at EM. On a sequential basis, gross profit margin was up at both operating groups as the markets recovered. Operating margin came in at 3.4% compared to 3.6% recorded last year. Net income for the quarter was $100.5 million, or 66 cents per share, which was above the year-earlier results of $95 million, or 63 cents per share and also beat the Zacks Consensus Estimate of 59 cents per share.

During the second quarter, Avnet used $97 million of cash in operating activities. Avnet ended the quarter with cash and equivalents of $895 million.

Going forward, management at Avnet expects sales between $4.10 billion and $4.70 billion in the third quarter. Revenues from the EM segment are expected to come between $2.55 billion and $2.85 billion. Revenues from the TS segment are projected between $1.55 billion and $1.85 billion. Avnet continues to invest in organic growth along with expanding in the new high growth markets of China and India. Gross margin is expected to improve in the third quarter. Earnings per share are estimated between 53 cents and 61 cents.

While the company should benefit in the longer term from its range of offerings, a large customer base, variable cost structure and management’s cost-control measures, we would like to be on the sidelines before becoming positive on Avnet Inc. Avnet is expected to gain momentum as spending recovers. The recovery is expected to be slow and steady and visibility is not clear, at least in the near-term. Our long-term recommendation for Avnet is Neutral, which means the stock will perform roughly in line with the broader market.

Based in Phoenix, AZ, Avnet is one of the world’s largest distributors of electronic components and computer products.

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