Avnet, Inc. (AVT) is one of the world's largest distributors of electronic components and computer products. The company reported June quarter revenue and adjusted EPS of $4.68 billion and $0.85 versus our estimates of $4.60 billion and $0.80, respectively.
Generally speaking, performance improved sequentially across the company quarter over quarter [q/q], particularly at Technology Solutions (TS), where there was a nice jump in operating margin, despite a notable softening of the European IT market. That said, growth appears stalled or slowing in nearly every region on an organic basis, making it difficult for the distributor to realize significant operating leverage.
In fact, the September quarter guidance calls for another year-over-year [y/y] decline in operating margin, despite ongoing cost cutting efforts. The company does continue to execute well, positioning itself with lean inventories, a large cash stockpile and an increasingly lean cost structure. In this environment, however, we believe the uncertainty around demand warrants caution from investors.
Avnet shares are currently trading at 9.4x multiple to our fiscal 2009 earnings estimate. The TTM ROE [trailing 12-month return on equity] was 13.3%. After rising steadily for six quarters till Q4:FY2007, the metric has picked up slightly from 11.5% to 12.4% as of the June quarter. We analyzed the ROE by splitting it into its three components net margin, asset turnover and equity multiplier. The combination of cost reductions and strategic acquisitions is raising the TTM net margin.
TTM revenue had grown steadily up until Q1:FY08 and has bounced back in Q4:FY08. This is outpacing the growth in assets, indicating that the company is efficient in converting assets to revenue. However, Avnet has over $1 billion in long-term debt.
The equity multiplier has been bumpy over the last 11 quarters, as equity had been increasing faster than the increase in total assets. This is a metric to watch, given the company's already large total debt position. We upgrade our rating to a Hold from Sell with a target price of $31.00.
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