We recently downgraded our recommendation to Neutral from Outperform on Arrow Electronics (ARW).
Arrow reported a net income (excluding loss on prepayment of debt and restructuring, integration, and other charges) of $159.8 million or $1.36 per share in the second quarter of fiscal 2011 compared with a net income of $121.3 million or $1.01 per share in the year-earlier quarter.
Arrow, which competes with Avnet, Inc. (AVT) reported sales of $5.5 billion in the quarter, up 20% year over year and up 6% sequentially. On a segmental basis, Global component sales of $3.88 billion increased 19% year over year led by growth in the core business and product sets.
Management stated that global component sales growth was very strong, driven by year-over-year increases across a wide number of products sets and verticals in the core business on a global basis. On a sequential basis, sales met normal seasonality, but were below management’s expectation of above seasonal growth.
Revenues from Global enterprise computing solutions (ECS) soared 23% year over year to $1.66 billion, fueled by growth across all product lines, including proprietary servers, industry-standard servers and software. On a sequential basis, ECS sales were ahead of normal seasonality, based on Arrow’s broad strength across products and regions.
Earnings estimates have declined in the last thirty days. Although second-quarter results came in line with the Zacks Consensus Estimate, the guidance for the third quarter was disappointing.
Arrow expects 2011 sales between $5.15 billion and $5.55 billion in the third quarter. Management stated that the core global components business is expected to be in line with the low-end of normal seasonality resulting from oversupply of inventory in the supply chain at the end of the second quarter and weaker global macroeconomic conditions.
Sales were strong in April and May but growth slowed in June and book-to-bill fell below 1. This was primarily attributable to economic challenges in Europe.
Hence, we downgrade our recommendation to Neutral from Outperform. In the short-run, we have a Zacks #4 Rank, which translates into a short-term rating of Sell, primarily due to the near-term pressure on the stock because of the weakness in guidance.
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