Avnet: Progressive Distributor, Good Investment

Let’s begin the analysis of Avnet by explaining exactly how a technology industry distributor functions by using Intel products as an example.

 Intel has a few large, high-volume strategic customers such as Dell, Hewlett-Packard and Sony that require the service of Intel’s direct sales force.  Several sales people are assigned to each of these accounts, and only these accounts.  At the same time, Intel has a sizable market of small customers that also represent very large revenues for the semiconductor giant.

To serve this vast array of worldwide smaller customers, Intel uses a distributor like Avnet.  Utilizing their own sales, marketing, and technical support people, Avnet seeks out these smaller customers and accepts purchase orders from them.  Avnet then ships the purchased products from their own inventory centers or may have Intel ship directly to the customer.

Avnet is the largest global distribution company with a good presence in the Americas, Asia, Europe and the United Kingdom.  Asia is particularly important as this area of the world is offering the fastest growth in the electronics industry.  Through the years, Avnet has grown organically (from within), but their largest growth has been accomplished by acquisition.

The company has expanded beyond the simple component distribution function and now distributes electronic components, “enterprise” computer and storage products for large companies, and embedded subsystems worldwide.

The company operates in two segments, Electronics Marketing and Technology Solutions.

The Electronics Marketing group markets and sells semiconductors as well as interconnect, passive, and electromechanical devices to electronic system manufacturers in various industries. That list includes automotive, communications, computer hardware, industrial and manufacturing, medical equipment, military, and aerospace.  This segment also offers various value-added services that help customers evaluate, design-in, and procure electronic components of their technology products and systems.  In this respect, Avnet provides services like supply-chain management, engineering design, inventory replenishment systems, connector and cable assembly, and semiconductor programming.

The Technology Solutions group markets and sells mid-range to high-end servers, data storage, and software products.  They also provide the services required to implement these products and solutions to the value-added reseller channel, original equipment manufacturers, independent software vendors, system builders, and system integrators.  In addition, Avnet provides logistics, financial, marketing, sales, and technical services including engineering support, systems integration, and configurations.  Through this group, Avnet also offers technical design, integration, and assembly to developers of application-specific computing solutions in the non-PC market.  Examples include companies that target the medical, telecommunications, industrial, and digital editing markets.

The Avnet field customer engineering group is well trained and is considered to be a step ahead of their competition, a necessity when providing solution services to knowledgeable customers.

Roy Vallee, current chairman and CEO of this 87-year-old company, is an excellent leader with the ability to look into the future to determine what needs to change to meet his industry’s future directions.

Avnet’s nearest competitor is Arrow Electronics, a close second to Avnet in key financial statistics such as revenues and profits.  However, in my view, Arrow is slower to see the importance of emerging global markets.

The company is reflecting the slowdown of the global economy, but still shows good fundamentals including a PEG (price/earnings over earnings growth) of 0.36—low for a company in the electronics business.  The debt-to-equity is also low at 0.26 with a long term debt of $1.1 billion and $640 million cash on hand. The quarterly revenue growth rate is close to 11 percent.  In fiscal 2008 (ending July 1), free cash flow dropped by 37 percent from the prior year.  However, Avnet generated more than $724 million of free cash flow in fiscal 2007.  For fiscal years 2004 to 2007, net income grew nicely from $60 million to nearly $500 million.  Today, the stock price closed at $14.97—a 52-week low compared to the 52-week high of $44.37.

While not a high-flying glamour company, at these prices I believe the company’s stock merits a buy.  The price will only go up as the world’s economies recover.

Copyright by Bill Durrenberger October 24, 2008.  All rights reserved.
Disclaimer: The statements and information presented in this article reflect the opinions of the author and do not constitute a recommendation to buy or sell specific securities.  Before purchase of any investment, the buyer should consult a financial adviser.