Avnet, Inc. (NASDAQ:AVT) is a global electronics component distributor headquartered in Phoenix, Arizona. In this thesis, I will analyze its second-quarter results along with its future growth prospects. I will also be analyzing its valuation at the current price level and the upside potential in the stock price. AVT has been experiencing soft demand across Asia and EMEA countries in the past few quarters, and the recovery doesn’t seem to be imminent. Hence, I assign a Hold rating for AVT.
AVT is a leading distributor of electronic components, IT solutions, and embedded technology. Its electronic components segment includes a wide array of products, such as semiconductors, connectors, passive components, and electromechanical devices. Its IT solutions and services consist of cloud computing, cybersecurity, data analytics, and other technologies that help organizations enhance their operational efficiency and competitiveness. AVT is also involved in the distribution of embedded technology solutions, serving industries such as aerospace, defense, automotive, and industrial automation. This includes providing components, systems, and engineering support for the development of embedded systems and IoT applications.
Q2 FY2024 Result
AVT recently reported its second quarterly results, with both revenues and EPS in line with the market estimates. The weak broader market sentiment resulted in a y-o-y decline in both sales and profitability. As per my analysis, the semiconductor inventory absorption by its clientele globally has resulted in declining sales. Across all geographies and business segments, it has experienced a decline in sales. The expected interest rate cuts in the second half of 2024 could help AVT in reviving demand, but given the current market conditions, a recovery in revenue remains elusive.
It reported total sales of $6.2 billion, a 7.6% decline compared to $6.7 billion in the same quarter last year. As I had previously mentioned, a global slowdown led to softer demand, especially from the Asian markets, which primarily resulted in declining sales. The electronic component segments, which contribute the majority of the revenues, proved to be the primary revenue dragger with a 7.9% fall in revenues at $5.8 billion, compared to $6.3 billion in the corresponding quarter last year. The semiconductor inventory absorption across industries resulted in this decline. The net income for the quarter was reported at $118 million, a massive decline of 51.5% compared to $243.8 million in the same period the previous year. I would like to highlight that it managed to keep its operating expenses under control. However, a substantial fall in the revenues resulted in this significant fall in profits. The diluted EPS for the quarter was reported at $1.28, down from $2.63 in the same quarter last year.
Now, let us have a look at its balance sheet. As of December 30, 2023, it reported cash and cash equivalent of 272.8 million against long-term debt of $2.75 billion. This clearly reflects that the company has a significant debt obligation that would make its future fundraising to boost growth really difficult without putting significant stress on its balance sheet.
Overall, AVT failed to impress me on multiple parameters, including declining profit margins and sales growth. The future guidance by the management doesn’t paint a different picture either. It estimates third quarter FY24 sales to be in the range of $5.55-$5.85 billion, representing a 14%-10% decline compared to revenue of $6.5 billion in Q3 FY23. The diluted EPS is estimated to be in the range of $1.05-$1.15, compared to $2.03 in the same quarter last year. The guidance clearly reflects that the situation might worsen, and both sales and profits are expected to deteriorate going into 2024.
AVT is currently trading at a share price of $44.97, a YTD decline of 10.77%. It has a market cap of $4.1 billion. It is trading at a forward GAAP P/E multiple of 8x compared to the industry standard of 28x. I believe it is trading at a cheap valuation, but its financial performance doesn’t complement its upside potential. Till the revenues get back on the growth track, I do not see a significant upside in the stock price. Existing investors can hold the stock, but initiating a fresh buying position is not recommended, given the signs of worsening financial performance.
Weak demand and inventory issues have resulted in subdued revenues for the company. Profitability also took a hit as a result of declining revenues. The future guidance indicates that no significant recovery is in sight. High debt obligation could hamper the future by putting significant stress on its balance sheet. It is trading at a cheap valuation, but worsening financial performance could soon change that. Considering all these factors, I assign a Hold rating for AVT.