On Aug 29, 2014, we issued an updated research report on Arrow Electronics Inc. (ARW) following the company’s better-than-expected second-quarter results.

Notably, year-over-year comparisons were up and Arrow had a favorable book-to-bill ratio. Moreover, positive commentary about enhanced productivity and continued higher contributions from Europe were encouraging.

Arrow’s core strength of providing best-in-class services is expected to bolster its growth in the future. Additionally, the company has secured significant market share through its broad portfolio of products and services and continued efforts to maximize consumer satisfaction. We believe that its expertise in understanding market dynamics and strong product portfolio will continue to support growth.

Arrow has initiated restructuring activities to boost operational efficiency. As part of its restructuring initiatives, Arrow terminated 140 positions from the global components business segment and 150 from the ECS business segment in the first six months of fiscal 2014. During the period, the company also closed down nine facilities in the Americas and EMEA regions. This reflects the company’s ongoing effort to trim expenses and boost margins.

Spending on electronic components and computer products is highly dependent on the overall IT spending. Per the U.S. research firm Gartner, overall IT spending is expected to grow 2.1% in 2014 and 3.7% in 2015. Although the 2014 forecast was lowered from earlier projection of 3.1% growth due to soft demand in devices, data center systems and IT services, the research firm expects IT spending to normalize in the 2015-2018 period. The improvement in spending will mostly be driven by enterprise software, IT services and digitalization of business processes. We believe Arrow is well positioned to capitalize on the opportunity.

Apart from this, Arrow has returned cash through share repurchases. On May 21, the company announced the buyback of an additional $200 million worth of its common stock under a new share repurchase program. During the first six months of fiscal 2014 (ended Jun 28, 2014), the company repurchased stocks worth $138.8 million. These initiatives are expected to support the company’s bottom line, going forward.

However, on the downside, Arrow has a highly leveraged balance sheet that weakens its earnings growth prospects. As of Jun 28, 2014, the company’s net debt amounted to $1.81 billion compared with $1.90 billion as on Mar 29, 2014. Also, the company has to generate substantial amount of cash flow to effectively service its debt.

A significant portion of the company’s revenues comes from the sales of semiconductors, which is a cyclical industry characterized by changes in technology and manufacturing capacity and is subject to significant market upturns and downturns. According to World Semiconductor Trade Statistics (:WSTS) data, worldwide semiconductor sales are expected to grow 6.5% in 2014 but moderate to 3.3% growth by 2015. Therefore, a slowdown in this market indicates a slowdown in the company’s business in 2015.

Also, uncertain economic conditions and competition from Avnet (AVT) and Ingram Micro (IM) are the concerns.

Currently, Arrow has a Zacks Rank #3 (Hold). A better-ranked stock worth considering in the technology sector is Micron Technology Inc. (MU) carrying a Zacks Rank #2 (Buy).

Read the Full Research Report on IM
Read the Full Research Report on ARW
Read the Full Research Report on AVT
Read the Full Research Report on MU


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