January 30, 2015 Avnet, Inc. Current Recommendation Prior Recommendation SUMMARY DATA NEUTRAL Underperform Date of Last Change 04/02/2013 Current Price (01/29/15) $42.26 Target Price $44.00 52-Week High $47.50 52-Week Low $36.54 One-Year Return (%) 3.69 Beta 1.55 Average Daily Volume (sh) 751,089 Shares Outstanding (mil) 136 Market Capitalization ($mil) $5,763 Short Interest Ratio (days) 4.30 Institutional Ownership (%) 93 Insider Ownership (%) 1 Annual Cash Dividend $0.64 Dividend Yield (%) 1.51 5-Yr. Historical Growth Rates Sales (%) 6.6 Earnings Per Share (%) 6.8 Dividend (%) N/A using TTM EPS 9.5 using 2015 Estimate 9.2 using 2016 Estimate 8.5 Zacks Rank *: Short Term 1 3 months outlook * Definition / Disclosure on last page 3 - Hold SUMMARY Risk Level * Type of Stock (AVT-NYSE) Avnet posted better-than-expected second-quarter fiscal 2015 results. Year-over-year comparisons were also favorable primarily due to the solid performance of the EM business and higher operating income. The guidance, however, was less than encouraging. Avnet s leading position in electronics distribution, cost cutting initiatives and acquisition synergies are encouraging. However, a significant portion of the company s revenues comes from the sale of semiconductors, which is a cyclical industry characterized by changes in technology and manufacturing capacity and is subject to significant market upturns and downturns. Moreover, competition from its peers remains a headwind. Thus, we reiterate our Neutral recommendation on Avnet. Below Avg., Large-Value Industry Elec Parts Dist Zacks Industry Rank * 185 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Sep) (Dec) (Mar) (Jun) (Jun) 2013 5,870 A 6,699 A 6,299 A 6,591 A 25,459 A 2014 6,345 A 7,422 A 6,684 A 7,049 A 27,500 A 2015 6,840 A 7,552 A 6,915 E 7,150 E 28,457 E 2016 7,042 E 7,575 E 29,193 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Sep) (Dec) (Mar) (Jun) (Jun) 2013 $0.59 A $1.01 A $0.90 A $0.98 A $3.48 A 2014 $0.90 A $1.17 A $1.03 A $1.14 A $4.24 A 2015 $1.02 A $1.27 A $1.10 E $1.20 E $4.59 E 2016 $1.09 E $1.34 E $4.96 E Projected EPS Growth - Next 5 Years % N/A 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Based in Phoenix, AZ, Avnet Inc., (AVT) is one of the world s largest distributors of electronic components and computer products. The company s customer base includes original equipment manufacturers (OEMs), electronic manufacturing services (EMS) providers, original design manufacturers (ODMs), and value-added resellers (VARs). Avnet maintains an extensive inventory, including electronic products from over 300 component and system manufacturers, which it distributes to customers worldwide. The company distributes products for companies like International Business Machines Corp. and Hewlett-Packard Co. The product set consists of semiconductors (approximately 47.9% of fiscal 2014 revenues), computer products (38.4%), passives, and electromechanical & other (10.8%) and connectors (2.9%). Avnet operates in two segments Electronics Marketing (EM) and Technology Solutions (TS). The EM segment distributes semiconductors and Interconnect, passive and electromechanical devices (IP&E), and provides supply chain management, inventory replenishment system and non-complex engineering design services. In fiscal 2014, the EM segment generated 60.1% of total sales. The TS Group distributes mid- and high-end servers, data-storage gear, networking equipment and software services. Additionally, in fiscal 2014, the TS segment generated about 39.9% of total sales. Revenue by Product Categories--2014 Revenue by Operating Segments--2014 2.9% 10.8% 47.9% 39.9% 60.1% 38.4% Semiconductors Computer products Connectors Passives, electromechanical and other Electronics Marketing Technology Solutions On a geographical basis, Avnet generated approximately 40% of its revenues from operations in the Americas in fiscal 2014 while Europe, the Middle East and Africa (EMEA) contributed about 30%. The Asia/Pacific region accounted for 30% of revenues. Equity Research AVT Page 2
Revenue by Geography--2014 30.0% 40.0% 30.0% Americas EMEA Asia/Pac Avnet s major competitors include Arrow Electronics Inc., Ingram Micro Inc., Future Electronics and World Peace Group. REASONS TO BUY Avnet is a key distributor of electronic components and computer products. It offers a wide range of products such as semiconductors, computer products, passives and electromechanical connectors. The company s revenues were up 8% in fiscal 2014 on a year-over-year basis, primarily due to resurgent demand across geographies (the Americas, EMEA and Asia). Also, the year-over-year increase was attributed to a strong Electronics Marketing business (up 9.6%) and Technology Solutions business (up 5.7%). Spending on electronic components and computer products is highly dependent on overall IT spending. Per U.S. research firm Gartner, overall IT spending was projected to grow 2.6% in 2014 to $3.8 trillion. The 2014 forecast was increased from the earlier projection of 2.1% growth driven by better-than-expected demand in devices, data center systems and with exchange rate fluctuations. Also, by 2018, spending is estimated to exceed $4.3 trillion mostly driven by enterprise software, IT services and digitalization of business processes. We believe the company is well-positioned to capitalize on the opportunity and maintain its leadership position. These predictions bode well with the company s Technology Solutions segment deriving revenues from the distribution of enterprise computing servers and systems, software, storage and related services. During fiscal 2014, revenues from the segment increased 5.7% from the year-ago period. The steady flow of acquisitions is expected to contribute significantly to its revenue stream. Avnet s recent acquisitions have been targeted at expanding its international business, with particular focus on Europe, the Middle East and Asia. During fiscal 2014, Avnet acquired three companies with combined annualized revenues of approximately $492 million. During fiscal 2013, Avnet acquired 12 companies with combined annualized revenues of approximately $1.18 billion. Most recently, Avnet expanded its technology solutions portfolio by announcing the availability of ConvergedSystem 700 solutions powered by Hewlett-Packard Co. s OneView infrastructure for its channel partners in the U.S. These acquisitions are expected to comprehensively bolster its performance and augment its product base and operational network. Equity Research AVT Page 3
Avnet has initiated several restructuring initiatives that are expected to yield long-term operational benefits. During fiscal 2013, the company reduced its headcount by more than 1,600 while closing 32 facilities in the Americas, 11 in the Asia region and 26 in EMEA. During fiscal 2014, the company reduced its headcount by another 1,100 as part of the restructuring initiative. These factors positively impacted operating margins in fiscal 2014. Also, the company started a restructuring initiative in the EMEA region, which is expected to save up to $15 to $20 million of costs annually from the second half of fiscal 2015. Avnet initiated a dividend policy in Nov 2013. During fiscal 2014, Avnet paid dividends worth $82.8 million. The company has also repurchased shares worth $8.6 million during the period and approximately $215.9 million remains under its current $750 million share repurchase plan initiated in Aug 2012. During the quarter, Avnet repurchased shares worth $91 million and had $357 million remaining under its stock repurchase program at quarter-end. These shareholder-friendly initiatives not only instill investors confidence but also boost earnings. REASONS TO SELL Avnet s domestic and foreign operations are subject to significant competition. It faces stiff competition from Arrow Electronics Inc. a formidable rival. Arrow s acquisition of Waching's Wireless business, ALTIMATE Group, Global Link Technology, Redemtech and expansion in Sao Paulo, Brazil can turn out to be highly profitable, and pose a serious threat to Avnet, going forward. IBM is a significant contributor to Avnet s revenues. In fiscal 2014, IBM accounted for 13% of Avnet s total revenue, up from 12% in fiscal 2013. Now that IBM has sold its x86 server business to Lenovo, which accounted for 5% to 6% of Technology Solution revenues, it could impact overall revenues if Lenovo discontinues Avnet s distribution services. A significant portion of the company s revenues comes from the sales of semiconductors, which is a cyclical industry characterized by changes in technology and manufacturing capacity and is subject to significant market upturns and downturns. According to World Semiconductor Trade Statistics (WSTS) data, worldwide semiconductor sales are expected to grow 9% in 2014 but moderate to 3.4% growth by 2015. Avnet s sale of semiconductor products and related services accounted for approximately 52.4%, 53.9% and 47.9% of consolidated sales in 2012, 2013 and 2014, respectively. Therefore, a slowdown in this market indicates a slowdown in the company s business in 2015. Asia undoubtedly remains one of the largest growth drivers in the current environment. Although profitable in the long run, the company s extensive investments in the region will impact its margins in the near term. Notably, during fiscal 2014, 2013 and 2012 roughly 65%, 63% and 61%, respectively, of the company's sales came from its operations outside the United States. Hence, we believe that any unfavorable currency fluctuations and an uncertain macroeconomic environment may temper growth at the company. Equity Research AVT Page 4
RECENT NEWS Second Quarter Highlights Jan 22, 2015 Avnet Inc. reported second-quarter 2015 adjusted earnings of $1.27 per share, which beat the Zacks Consensus Estimate of $1.20 per share. Earnings came ahead of management s guidance of $1.15 per share to $1.25 and were also up 8.5% on a year-over-year basis. Quarter Details Revenues of $7.55 billion were up 1.8% from the year-ago quarter. Reported revenues were toward the higher end of management s guidance range of $7.0 to $7.6 billion and beat the Zacks Consensus Estimate of $7.34 billion. The year-over-year increase was primarily due to a strong Electronics Marketing (EM) business. On a segmental basis, revenues from EM increased 6.8% from the year-ago quarter to $4.44 billion. The year-over-year increase was driven by sales increase in Asian regions (up 17.1% year over year). Revenues from Technology Solutions (TS) decreased 4.6% from the year-ago quarter to $3.12 billion, primarily due to a 13.4% decline in the Asian region. The company witnessed growth in software, services and storage solutions, which was offset by a decline in the computing components business. Gross profit for the quarter decreased 1.3% year over year to $837.5 million due to higher cost of sale. Gross margin contracted 30 basis points (bps) and came in 11.1%, primarily due to margin contraction in the EM business and TS business. Adjusted operating income increased 4.3% from the year-ago quarter to $274.6 million. Operating margin came in at 3.6% compared with 3.5% reported in the year-ago quarter. The increase was primarily led by the EMEA region and higher revenue base. Adjusted net income came in at $175.9 million or $1.27 per share compared with $163.9 million or $1.17 per share in the year-ago quarter. Adjusted net income excluded restructuring, integration and other charges, and amortization of intangible assets. Avnet exited the quarter with cash and cash equivalents of $903.3 million compared with $814.4 million in the previous quarter. Avnet s long-term debt came to $1.69 billion. The company generated $265 million cash in operating activities during the quarter. Avnet paid a dividend of $21.8 million ($0.16 per share) in the quarter. During the quarter, Avnet repurchased shares worth $91 million and had $357 million remaining under its stock repurchase program at quarter-end. Guidance For third-quarter fiscal 2015, the company projects consolidated sales in the range of $6.6 billion to $7.2 billion. Avnet projects EM and TS sales in the range of $4.15 billion $4.45 billion and $2.45 billion $2.75 billion, respectively. Adjusted earnings per share (excludes restructuring and integration charges related to costs reductions and acquisitions and amortization of intangibles) are expected within $1.04 per share to $1.14. The tax rate is likely to be in the range of 27% 31%. Equity Research AVT Page 5
VALUATION Avnet s shares are currently trading at 9.5X TTM earnings, a discount to the industry average of 11.1X and the S&P 500 average of 18.4X. Moreover, it is trading below the mid-point of the historical range of 6.1X to 16.1X TTM earnings, which indicates possibility of upward movement from the current level. Moreover, the shares are trading at a discount based on our 2015 forward estimates. However, the current 9.8% discount to the industry for 2015 is lower than the average discount for the historical period of 54.8%, which indicates limited possibility of upward movement. Given the mixed signals, we expect the shares to remain range-bound in the near term. Thus, we reiterate our Neutral recommendation on Avnet and set a price target of $44.00. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF (TTM) (TTM) 5-Yr High (TTM) Avnet, Inc. (AVT) 9.2 8.5 N/A 8.0 9.5 16.1 6.1 5-Yr Low (TTM) Industry Average 10.2 9.4 13.0 16.6 11.1 236.0 7.3 S&P 500 16.0 14.9 10.7 16.1 18.4 19.4 12.0 Arrow Electronics, Inc. (ARW) 8.9 8.4 N/A 8.2 9.7 16.8 5.5 WESCO International Inc. (WCC) 11.7 10.4 10.9 8.6 13.2 23.1 9.6 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B P/B P/B ROE D/E Div Yield EV/EBITDA Last 5-Yr High 5-Yr Low (TTM) Last Qtr. Last Qtr. (TTM) Qtr. Avnet, Inc. (AVT) 1.2 1.6 1.0 12.9 0.4 1.5 6.9 Industry Average 1.5 1.5 1.5 11.9 0.5 0.6 7.9 S&P 500 5.1 9.8 3.2 24.8 N/A 2.0 N/A Equity Research AVT Page 6
Earnings Surprise and Estimate Revision History Equity Research AVT Page 7
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of AVT. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1116 companies covered: Outperform - 15.6%, Neutral - 77.3%, Underperform 6.4%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research AVT Page 8