{"id":57409,"date":"2023-09-06T02:46:46","date_gmt":"2023-09-06T06:46:46","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/arrow-electronics-compounding-well-in-situ-across-fy23-so-far-initiate-buy-nysearw\/"},"modified":"2023-09-06T02:46:51","modified_gmt":"2023-09-06T06:46:51","slug":"arrow-electronics-compounding-well-in-situ-across-fy23-so-far-initiate-buy-nysearw","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=57409","title":{"rendered":"Arrow Electronics: Compounding Well In Situ Across FY’23 So Far, Initiate Buy (NYSE:ARW)"},"content":{"rendered":"
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Investment briefing<\/h2>\n

There is compelling value to be unlocked in buying the equity stock of Arrow Electronics (NYSE:ARW<\/span>) in our informed opinion. Based on the raft of economic factors discussed here today, I advocate ARW suits the long account based on several factors:<\/span><\/p>\n

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  1. ARW sells with more in capital invested per share than its current market value per share;<\/li>\n
  2. Each turn of invested capital produces ~$4 in sales, and the capital it’s deployed into operations returned ~$25\/share in trailing post-tax income in Q2 (above net income);<\/li>\n
  3. The market may not have reflected this earnings power into its current market value.<\/li>\n<\/ol>\n

    Based on the culmination of factors discussed here today, short-term machinations in the company’s end-markets (especially the cyclicality of order volumes and its backlog) do not appear a meaningful drag on future business performance, or hinder its ability to generate economic earnings for shareholders. Net-net, I initiate ARW as a buy at an initial objective of $155\/share.<\/span><\/p>\n

    Figure 1. ARW weekly price evolution, 2022-date<\/h4>\n

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    Data: Updata<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

    Risks to investment thesis<\/h2>\n

    It is critical that investors recognize, in full, the following set of risks that could potentially impact the thesis:<\/p>\n

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    1. ARW’s core markets are cyclical and subject to competitive change. This could result in ARW having to allocate an outsized portion of resources to match this competition, with no guarantees of success.<\/li>\n
    2. The company is amid an inventory correction and this may have an impact on its operating cash flows going forward.<\/li>\n
    3. We shouldn’t ignore the macro-level risks either, namely, the inflation\/rates axis and the corresponding impacts to capital flows.<\/li>\n
    4. Related to (3), should ARW fail to catch a bid, this could impact the propensity of it pushing towards the price targets outlined here today.<\/li>\n<\/ol>\n

      Investors must realize these risks before proceeding to any investment decisions.<\/p>\n

      Critical facts to investment debate<\/strong><\/h2>\n

      Brief overview of operations<\/h4>\n

      ARW is a global provider of electronic components and enterprise computing solutions for industrial and commercial users. It provides services, solutions, and tools that aid suppliers in distributing their technologies onto the market.<\/p>\n

      ARW operates through two business segments:<\/p>\n

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      1. \n

        Global components:<\/em> ARW distributes electronic components to original equipment manufacturers (“OEMs”) and contract manufacturers (“CMs”). In Q1 FY’23, ~78% of the company’s sales came from this segment.<\/p>\n<\/li>\n

      2. \n

        Enterprise computing solutions:<\/em> This segment focuses on enterprise computing solutions (“ECS”), and is service based. It contributed to ~22% of ARW’s Q2 top-line.<\/p>\n<\/li>\n<\/ol>\n

        Collectively, these segments offer a broad array of technological solutions in the value chain. The company started way back in 1935 and thus has demonstrated its ability to withstand numerous market cycles and still remain a profitable entity.<\/p>\n

        Q2 FY’23 insights<\/h4>\n

        1. Breakdown of the P&L<\/strong><\/em><\/p>\n

        ARW put up revenues of $8.5Bn for Q2, a 10% YoY decline. The contraction was underscored by reduced volumes in global semiconductor markets and overall business cyclicality. It pulled this to core EBITDA of $448mm, down from $581mm last year, and earnings of $4.17\/share, also down 25% YoY. More on profitability a bit later.<\/p>\n

        The divisional breakdown is as follows:<\/p>\n