Yahoo Finance Arrow Electronics (NYSE:ARW) Beats Expectations in Strong Q2
Global electronics components and solutions distributor Arrow Electronics (NYSE:ARW) reported Q2 CY2024 results beating Wall Street analysts' expectations , with revenue down 19% year on year to $6.89 billion. The company expects next quarter's revenue to be around $6.67 billion, in line with analysts' estimates. It made a non-GAAP profit of $2.78 per share, down from its profit of $4.37 per share in the same quarter last year.
Is now the time to buy Arrow Electronics? Find out in our full research report.
Arrow Electronics (ARW) Q2 CY2024 Highlights:
Revenue: $6.89 billion vs analyst estimates of $6.52 billion (5.7% beat)
EPS (non-GAAP): $2.78 vs analyst estimates of $2.16 (28.7% beat)
Revenue Guidance for Q3 CY2024 is $6.67 billion at the midpoint, roughly in line with what analysts were expecting
EPS (non-GAAP) Guidance for Q3 CY2024 is $2.20 at the midpoint, below analyst estimates of $2.44
Gross Margin (GAAP): 12.3%, down from 12.5% in the same quarter last year
Free Cash Flow of $298.1 million, down 20.2% from the previous quarter
Market Capitalization: $6.58 billion
Founded as a single retail store, Arrow Electronics (NYSE:ARW) provides electronic components and enterprise computing solutions to businesses globally.
Engineered Components and Systems
Engineered components and systems companies possess technical know-how in sometimes narrow areas such as metal forming or intelligent robotics. Lately, automation and connected equipment collecting analyzable data have been trending, creating new demand. On the other hand, like the broader industrials sector, engineered components and systems companies are at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.
Sales Growth
A company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones tend to grow for years. Arrow Electronics's demand was weak over the last five years as its sales were flat, a poor baseline for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Arrow Electronics's recent history shows its demand has stayed suppressed as its revenue has declined by 9.3% annually over the last two years.
We can dig further into the company's revenue dynamics by analyzing its most important segments, Components and ECS, which are 73% and 27% of revenue. Over the last two years, Arrow Electronics's Components revenue (electronic component sales) averaged 10.5% year-on-year declines while its ECS revenue (computing solutions and services) averaged 3.1% declines.
This quarter, Arrow Electronics's revenue fell 19% year on year to $6.89 billion but beat Wall Street's estimates by 5.7%. The company is guiding for a 16.7% year-on-year revenue decline next quarter to $6.67 billion, a deceleration from the 13.6% year-on-year decrease it recorded in the same quarter last year. Looking ahead, Wall Street expects revenue to decline 6.5% over the next 12 months.
Today’s young investors likely haven’t read the timeless lessons in Gorilla Game: Picking Winners In High Technology because it was written more than 20 years ago when Microsoft and Apple were first establishing their supremacy. But if we apply the same principles, then enterprise software stocks leveraging their own generative AI capabilities may well be the Gorillas of the future. So, in that spirit, we are excited to present our Special Free Report on a profitable, fast-growing enterprise software stock that is already riding the automation wave and looking to catch the generative AI next.
Operating Margin
Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Arrow Electronics was profitable over the last five years but held back by its large expense base. It demonstrated lousy profitability for an industrials business, producing an average operating margin of 4.2%. This result isn't too surprising given its low gross margin as a starting point.
Looking at the trend in its profitability, Arrow Electronics's annual operating margin might have seen some fluctuations but has remained more or less the same over the last five years, which doesn't help its cause.
This quarter, Arrow Electronics generated an operating profit margin of 3.1%, down 1.5 percentage points year on year. Since Arrow Electronics's operating margin decreased more than its gross margin, we can assume the company was recently less efficient because expenses such as sales, marketing, R&D, and administrative overhead increased.
EPS
Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.
Arrow Electronics's EPS grew at a solid 10.2% compounded annual growth rate over the last five years, higher than its flat revenue. However, this alone doesn't tell us much about its day-to-day operations because its operating margin didn't expand.
Diving into the nuances of Arrow Electronics's earnings can give us a better understanding of its performance. A five-year view shows that Arrow Electronics has repurchased its stock, shrinking its share count by 36%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.
Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Arrow Electronics, its two-year annual EPS declines of 19.7% show its recent history was to blame for its underperformance over the last five years. We hope Arrow Electronics can return to earnings growth in the future.
In Q2, Arrow Electronics reported EPS at $2.78, down from $4.37 in the same quarter last year. Despite falling year on year, this print easily cleared analysts' estimates. Over the next 12 months, Wall Street expects Arrow Electronics to perform poorly. Analysts are projecting its EPS of $13.31 in the last year to shrink by 7.6% to $12.30.
Key Takeaways from Arrow Electronics's Q2 Results
We were impressed by how significantly Arrow Electronics blew past analysts' EPS expectations this quarter. We were also excited its revenue outperformed Wall Street's estimates. Zooming out, we think this was a great quarter that shareholders will appreciate. The stock remained flat at $124.40 immediately following the results.
Arrow Electronics may have had a good quarter, but does that mean you should invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.
