Decades-high inflation and aggressive interest rate hikes by an equally resolute Federal Reserve hit the thriving technology industry hard last year. With the money which financed its purple patch no longer virtually free, growth at all costs made way for profitability and survival as priorities for the technology sector.
However, the falling-out-of-favor technology sector has also made stocks of fundamentally robust businesses, such as Arrow Electronics, Inc. (ARW), more affordable for bargain hunters.
ARW offers products, services, and solutions to industrial and commercial users of electronic components and enterprise computing solutions. The company’s segments include the global components business and the global enterprise computing solutions (ECS) business. Both segments have operations in each of the three electronics markets: the Americas; Europe, Middle East, and Africa; and Asia-Pacific regions.
The stock has gained 15.6% over the past month to close the last trading session at $128.59, above its 50-day and 200-day moving averages of $111.51 and $110.38, respectively.
Let’s closely examine the factors that make it worthy of investment.
Impressive Track Record
Over the past three years, ARW’s revenue has grown at an 8.7% CAGR. During the same period, the company also registered EBITDA and total assets growth at 28.4% and 9.9% CAGRs, respectively.
Due to efficient capital allocation, ARW’s trailing-12-month return on common equity of 26.35% surpassed the industry average of 4.87%. Similarly, its trailing-12-month return on total capital and return on total assets of 14.73% and 6.56% compare favorably to the industry averages of 3.01% and 1.47%, respectively.
Positive Recent Developments
On January 24, ARW announced the signing of a global agreement with Lenovo to deliver its TruScale Infrastructure-as-a-Service (IaaS) solution through value-added resellers, managed service providers, and telcos.
TruScale IaaS operates on a consumption-based subscription model that allows companies to use and pay for data center solutions without purchasing the equipment. ARW can help Lenovo align costs with business growth by providing services for a seamless, responsive, and reliable hybrid cloud operation.
On January 20, ARW signed a pan-European distribution agreement with Synopsys, Inc. to deliver an extensive portfolio of application security (AppSec) testing solutions to resellers in Europe, the Middle East, and Africa (EMEA).
This would help ARW promote streamlined procurement, enhanced security execution, cloud migration, and digital transformation projects to ensure an optimal customer experience.
For the fiscal 2022 fourth quarter ended December 31, 2022, ARW’s sales increased 3.4% year-over-year to $9.32 billion, up 8% year-over-year, excluding the effect of currency fluctuations. During the same period, the company’s gross profit increased 0.8% year-over-year to $1.21 billion, while its non-GAAP operating income increased 1.7% year-over-year to $533.48 million.
As a result, ARW’s non-GAAP net income increased 6% year-over-year to $5.69 per share. The company’s total assets stood at $21.76 billion as of December 31, 2022, compared to $19.54 billion as of December 31, 2021.
Despite the strong price performance, in terms of its forward P/E, ARW is trading at 7.45x, 63.9% lower than the industry average of 20.65x. Similarly, the stock’s forward EV/Sales and EV/EBITDA multiples of 0.34 and 6.53 also compare favorably to the respective industry averages of 3.04 and 13.36.
Moreover, ARW’s forward Price/Cash Flow multiple of 11.45 is 39.6% lower than the industry average of 18.97.
Such comfortable valuations indicate further upside potential in the stock.
POWR Ratings Reflect Promising Prospects
ARW’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. ARW has an A grade for Momentum, consistent with the uptrend in its price.
Also, ARW’s attractive valuation has earned it a B grade for Value. It ranks #13 of 44 stocks in the Technology – Electronics industry.
Click here to see the additional POWR Ratings for ARW’s Growth, Stability, Sentiment, and Quality.
While most tech majors have provided bleak guidance for 2023, ARW’s management has backed up their confidence in the company’s prospects by repurchasing $300 million of shares during the fourth quarter of the fiscal year 2022.
ARW has doubled down on this value-creation process with the approval for an additional $1 billion repurchase authorization.
Robust financials, impressive track record, and attractive valuation make ARW an attractive investment option now.
How Does Arrow Electronics, Inc. (ARW) Stack up Against Its Peers?
In addition to ARW, which has an overall POWR Rating of B, investors could also consider looking at its A-rated industry peers: Vishay Intertechnology, Inc. (VSH), Bel Fuse Inc. (BELFB), and Universal Electronics Inc. (UEIC).
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REVISED: 2023 Stock Market Outlook (includes top 7 picks)
ARW shares were trading at $130.14 per share on Thursday morning, up $1.55 (+1.21%). Year-to-date, ARW has gained 24.45%, versus a 7.50% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities. More...
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