Avnet, Inc. (AVT) is expected to report results for Q3:FY08 on April 24, 2008. Avnet reported revenues of $4.75 billion for Q2 of fiscal 2008, up 22.2% from the year earlier and exceeded our estimate of $4.53 billion. Management expects to post EPS of $0.85 - $0.89 on revenues of $4.37-$4.57 billion in the third quarter of fiscal 2008.
Based on indications that its acquisition pipelines are filling up and is expected to offset declining organic growth, we now expect roughly $3 billion in annualized revenues from acquisitions made since 2007. However, given acquisition related integration risks and concerns related to its high level of debt, we are maintaining our Sell rating.
Avnet shares are currently trading at 10.3x multiple to our fiscal 2008 earnings estimate. While the company should benefit longer-term from its range of offerings, large customer base, variable cost structure and management's cost control measures, we consider the valuation quite rich.
The core business looks weak, and all the growth seems to be coming from acquisitions. Management's expectations of $160 million in yearly synergies from the Memec acquisition could prove to be aggressive. The Access acquisition is a big positive, as it is expected to make a significant contribution to both revenue and EPS.
However, management raised debt to fund the acquisition, which will further increase interest payouts and squeeze net margins. Our current target price is $32 (9.7x FY2008 earnings estimate), to reflect the potential benefit from the Access acquisition and the expected bottoming of the semiconductor cycle.
Read the full analyst report on AVT.
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