Avnet Lags on Q3 Earnings, Revs - Analyst Blog

Avnet Inc.'s AVT shares plunged 6.74% in Thursday's trade as the company's adjusted earnings of $1.03 per share in the third quarter of fiscal 2014, lagged the Zacks Consensus Estimate of $1.07 per share. Earnings were at the lower end of management's guidance range of $1.02 to $1.12 but were up 8.4% on a year-over-year basis.

Quarter Details

Revenues of $6.68 billion were up 6.1% from the year-ago quarter. However, revenues came in at the lower end of management's guidance range of $6.6 to $7.2 billion and lagged the Zacks Consensus Estimate of $6.86 billion. The year-over-year increase was primarily due to strong Electronics Marketing (EM) business and softer-than-expected Technology Solutions TS business.

On a segmental basis, revenues from EM grew 8.8% from the year-ago quarter to $4.13 billion and came within management's guided range of $4.0–$4.3 billion. The year-over-year increase was driven by increase in sales in the Asia and EMEA region. Organic sales reported 8.0% year-over-year growth.

Revenues from TS grew 2.0% from the year-ago quarter to $2.55 billion. Segmental revenues also came below management's guidance range of $2.6–$2.9 billion. The lower-than-expected growth was mainly due to soft demand in the Americas and EMEA region. The year-over-year growth was primarily due to higher sales from networking and security, and services which offset the decline in server sales. Organic sales were down 2.5% year over year.

Gross profit for the quarter increased 6.5% year over year to $804.9 million, while gross margins remained flat at 12% year over year as margin expansion in the EM business was offset by decline in TS business margins.

Adjusted operating income increased 9.9% from the year-ago quarter to $223.8 million, while operating margin came in at 3.3% compared to 3.2% in the year-ago quarter. The increase was primarily due to improvement in EM.

Adjusted net income came in at $144.1 million or $1.03 per share compared with $131.5 million or 95 cents in the year-ago quarter. Adjusted net income excluded restructuring, integration and other charges, gain on legal settlement and other, amortization of intangibles.

Avnet ended the quarter with cash and cash equivalents of $960.1 million compared with $779.3 million in the previous quarter. The company generated $358.1 million cash in operating activities. Avnet paid a dividend of $20.7 million (15 cents per share) in the quarter.

During the quarter, Avnet repurchased shares worth $1.3 million and at the end of the quarter the company had $223 million remaining under its $750 million stock repurchase program.

Guidance

For fourth-quarter fiscal 2014, the company projects consolidated sales in the range of $6.6 to $7.2 billion (mid-point $6.9 billion), while the Zacks Consensus Estimate is pegged at $7.08 billion. Avnet projects EM and TS sales in the range of $4.05–$4.35 billion and $2.55–$2.85 billion, respectively.

Adjusted earnings per share (excludes restructuring and integration charges related to costs reductions and acquisitions and amortization of intangibles) is likely to be within $1.04 to $1.14, lower than the Zacks Consensus Estimate of $1.18. The tax rate is likely in the range of 27–31%.

Our Take

Avnet posted mixed third-quarter results. The guidance was less-than-encouraging due to seasonality.

Moreover, 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.

Avnet's leading position in electronics distribution, continuous cost cutting initiatives and acquisition synergies are encouraging. It does, however, face stiff competition for both its domestic and foreign operations, especially from archrival Arrow Electronics Inc. ARW. However, we look forward to management's decision to optimize costs and investments to tap the changing demand.

Currently, Avnet has a Zacks Rank #3 (Hold). Investors can also consider other technology stocks such as Accenture ACN and Hewlett-Packard HPQ. Both the stocks sport a Zacks Rank #2 (Buy).