Avnet's Risk/Reward Ratio Continues To Be Attractive

Analysts at Brean Murray reiterate their "buy" rating on Avnet Inc AVT, while raising their estimates for the company. The target price for AVT is set to $40. AVT reported better-than-expected results for the latest quarter. Brean Murray says, “June Q gross margin improved 15 bps Q/Q driven by margin recovery in Europe . We continue to expect strong leverage given 1) if we are assuming a normalized environment, gross margin will continue to recover back to its pre-recession level, 2) gross profit drop-through (percent of gross profit dollar growth that goes into operating income) was at 70% during the Jun Q (still above “mature levels” of 50%). That being said, we expect that changes in products/geo mix and the addition of Bell Micro will soften part of the gross margin improvement.” “Avnet closed its largest acquisition in its history during the Sep Q. We believe the Bell Micro deal makes strategic sense given 1) its strength in hard disk drives (25% of sales) and data center software and 2) its strong presence in Europe/Latin America (17% of revenues). Management expects Bell Micro’s operating margin to be ~4.0% and the deal should generate $60M cost-saving synergies throughout FY11. In addition, management will continue building its M&A pipeline in order to gain scale and scope globally, especially in Asia . We estimate the Bell Micro acquisition could be $0.30-$0.40 accretive annually, which would add $3-$4/share to AVT’s current stock price…. We continue to like the risk / reward given the ongoing strong performance in Avnet’s core business and the accretion/synergy from the Bell Micro deal,” the analysts add. Brean Murray has raised its CY10 and CY11EPS estimates from $3.17 to $3.38 and from $3.35 to $3.80, respectively. More Analyst Ratings here