We have reiterated our long-term Neutral recommendation on Avnet Inc. (AVT).
Recently, Avnet, a distributor of electronic components and computer products, completed its acquisition of value-added IT distributor Amosdec SAS. The company expects to expand its footprint in Europe by leveraging its strength in data center and Amosdec’s position in software and services.
Avnet recovered in fiscal 2010 after a disastrous 2009, driven by strong global demand. The company’s revenues jumped 40.3% year over year in the third quarter of fiscal 2011 on the back of its aggressive acquisition strategy.
Furthermore, the company reported EPS of $1.10, surpassing the Zacks Consensus Estimate of 98 cents.
We believe that Avnet has been able to maintain its market position. The company’s range of products and services, solid inventory and strong customer relationships have helped it secure a substantial share of the market.
Over the long term, we remain positive on management’s policy of strategic acquisitions, which bodes well for expanding geographic and market coverage in world markets for electronic components and computer products. We expect future growth to come from strong demand for semiconductor components and development in the data center business.
Despite its impressive revenue growth in the first nine months of fiscal 2011, the company’s margins continue to pose a threat, especially in the Technology Solutions segment. In an effort to improve margins, the company is trying to divest the acquired business with lower margins.
Earnings estimates for fiscal 2011 increased by 25 cents in the last ninety days based on continuous top-line growth, which in turn resulted in better-than-expected earnings.
We currently have a long-term Neutral recommendation on Avnet, though we are worried about the acute pressure on margins, realization of synergies from acquisitions and the shift of business mix toward the low-margin Asian region.
In the short term, we have a Zacks #4 Rank (Sell rating).
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