Why Is Arrow Electronics (ARW) Down 14.8% Since Last Earnings Report?

A month has gone by since the last earnings report for Arrow Electronics (ARW). Shares have lost about 14.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Arrow Electronics due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Arrow's Q4 Earnings Beat, Revenues Miss Estimates

Arrow Electronics reported fourth-quarter 2019 adjusted earnings per share of $2.20, down 15.1% on a year-over-year basis. However, the figure surpassed the Zacks Consensus Estimate of $2.17.

Revenues came in at $7.34 billion, down 7% from the year-ago quarter. As adjusted, revenues slipped 5% year over year. The revenue figure also missed the consensus estimate of $7.36 billion.

Demand for components remained low during the fourth quarter, as a result of the prevalent geopolitical tensions. Demand from smaller customers was weaker than expected. Moreover, U.S. tariffs strained the company’s top-line growth.

Additionally, consumption of Arrow’s European exports continued to decline.

However, strong uptrend in design activity across all regions was a breather.

Segmental Details

Adjusted revenues from Global Components decreased 8% year over year to $4.74 billion. On a reported basis, revenues declined 10%.

Region wise, the segment’s adjusted revenues from the Americas dipped 15% due to high levels of inventory with customers. Adjusted sales from Asia Pacific climbed 4% year over year. Global components contribution from Europe fell 12% on an adjusted basis due to softer demand for products from Arrow’s exporting customers. Components sales in the Americas decreased 16% year over year as adjusted.

Adjusted revenues from Global Enterprise Computing Solutions (ECS) came in at $2.60 billion, down 1% year over year. Also, revenues from this segment declined 2% on a reported basis. Decline in legacy systems took a toll on revenues from this segment. However, strong momentum infrastructure software, next-generation hardware and hybrid cloud architectures were positives.

Billings for the ECS segment grew at a low single-digit rate, year over year, during the fourth quarter.

ECS revenues from the Americas declined 3% after adjusting for foreign-currency changes. Adjusted sales from Europe climbed 4% year over year.

Many customers continued to shift their manufacturing operations and design work out of the United States to avoid tariffs. This posed a significant threat to Arrow.

Notably, backlog improved sequentially. However, lead times declined year over year in the fourth quarter. The overall book to bill improved and reached near parity at 0.99.

Margins

Arrow’s gross profit decreased 15.6% from the prior-year quarter to $822.9 million.

Operating income dropped 28.8% to $238.1 million.

Arrow’s focus on realigning the enterprise computing solutions business toward new technologies and non-traditional customers was a positive.

Balance Sheet and Cash Flow

Arrow exited the fourth quarter with cash and cash equivalents of $300.1 million compared with the previous quarter’s $262.3 million.

Long-term debt was $2.64 billion compared with the $2.94 billion witnessed at the end of the prior quarter.

The company’s cash flow from operations was $494.8 million.

In the fourth quarter, Arrow returned approximately $100 million to shareholders through stock-repurchase program, and was left with approximately $339 million of authorization.

Full-Year Highlights

Arrow recorded full-year 2019 revenues of $28.67 billion, flat year over year. Adjusted earnings of $7.55 per share came in 14.9% lower than the prior-year level.

Guidance

For the first quarter of 2020, sales are expected between $6.23 billion and $6.63 billion.

Global components sales are projected at $4.55-$4.75 billion. Global ECS sales are estimated to be $1.68-$1.88 billion.

Interest and other expenses will presumably be about $52 million, as a result of which, the company projects non-GAAP earnings per share of $1.29-$1.39.

A foreign-exchange headwind of about $30 million is expected to be an overhang on the top line.

Several delays and extended lead times of China-manufactured products is expected in the current quarter due to business and transportation shutdowns, as well as the extended New Year Holiday week issued by the Chinese government.

Additionally, the first quarter of 2020 will close on Mar 28, two days earlier than the first quarter of 2019. This is expected to negatively impact sales by approximately $225 million and earnings per share by approximately 11 cents. The new closing date will impact only the global enterprise computing solutions.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -12.94% due to these changes.

VGM Scores

Currently, Arrow Electronics has a great Growth Score of A, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Arrow Electronics has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.