Zacks_Analysts' Blog : Arrow's Neutral Rating Reiterated - Analyst Blog

We retain our Neutral recommendation on Arrow Electronics (ARW).

Arrow has been focusing aggressively to capture more of emerging markets keeping in mind the present worldwide economic conditions. With the completion of the Seed International Ltd. (SEED) acquisition at Beijing, Arrow strengthened its foothold in China. Steps were also taken to proliferate the Asian markets by extending contract with SiTime Corp. to provide MEMS-based timing solutions to its Asian consumers.

Arrow recently announced its financial results for the third quarter of 2011. Revenues were up 11% year over year to $5.2 billion. Operating margins fell approximately 10 basis points from the previous year period to 4%. Net earnings were $1.20 per share, quite impressively beating the Zacks Consensus Estimate of $1.18 per share.

The quarter saw the evolution of Alcatel-Lucent enterprise solutions under the ECS segment to cater to the North American market, providing them with the latest enterprise data, voice and security solutions. Other endemic activities included the merger of Juniper Network Solutions to cater to data center solutions and network services meant for the domestic clients.

Even though the quarter was witness to some important mergers and contract dealings, it was disappointing and also bewildering when management provided a completely clouded forecast for the next quarter. Both ECS and Global Components are expected to yield enervated sales in the fourth quarter of 2011.

It seems that the burden of the financial crisis is becoming too onerous for Arrow Electronics, especially with regard to the European market. Promising revenue yields from developing and US regions are also not enough to offset the seriously deteriorating gains due to the depressed economic state prevalent in Europe at the moment.

Arrow needs to push the pedal onto a higher gear in order to overcome its challenges as it faces ominous threat from big players in the economy who are quite vigilant of the present scenario and making important advances gradually to battle it. One of them, Avnet Inc. (AVT) recently acquired Bell Micro to strengthen its Latin American market, besides Memec to cater to its electronic components distribution in Asia.

At this point, it would be wise to remain on the sidelines and see how Arrow Electronics performs under the existing economic and competitive pressures.

The current Zacks Consensus Estimate for the fiscal years 2011 and 2012 are $5.10 and $4.88, respectively. In the short run we have a Zacks #3 Rank, which translated to a short-term rating of Hold. We retain our long-term Neutral rating at the moment for the company’s stock.