AVT Stock Study (4-3-23)

I recently did a stock study on Avnet Inc. (AVT) with a closing price of $45.20.

Value Line writes:

     > Avnet, Inc. is a technology solutions company that markets,
     > sells, and distributes electronic components. The company
     > has two segments: Electronic Components (93% of ’22 sales),
     > which sells electr. components, semiconductors,
     > interconnect, passive and electromechanical components to
     > the world’s leading electronic component manufacturers;
     > Farnell (7%) sells kits, tools, test measurement, and
     > electronic components to customers that are developing and
     > testing their products. Acquired Premier Farnell, ’16.

Excluding ’18 and ’20, this large-sized company has posted annualized sales and EPS declines of 2.9% and 1% over the last 10 years. The company recorded goodwill impairment of ~$181M in ’18. COVID-19 shocked the world economy in ’20, which led to widespread losses. Even without these two years, lines are nowhere close to up, straight, and parallel.

For me, the analysis would end now as the company does not clear the barbed wire fence. However, I was introduced to Avnet by the recent Manifest Investing Roundtable in what was a rather attractive presentation. I will press on to see if “there’s gold in them thar hills” in the form of a potential non-core position.

PTPM decreased from 2.2% in ’13 to 0.9% in ’21 before rebounding to 3.4% in ’22. This trails peer and industry averages.

ROE fell below 10% in ’17 and remained there until ’22 when it spiked to 15.9%. The last-5-year average is 4.2% (including negative numbers for ’18 and ’20). This is disappointingly low and trails peer/industry averages.

As some potential bright spots, Debt-to-Capital has been lower than peer and industry averages with a last-5-year mean of 29%. Interest Coverage is 7.5, Quick Ratio is 1.26, and Value Line gives an A rating for Financial Strength.

I forecast long-term annualized sales growth of 2% based on the following:

• CNN Business projects 6.2% YOY growth and 2.3% contraction per year for ’23 and ’22-’24 (based on 7 analysts).
• YF projects YOY 5.9% growth and 10% contraction for ’23 and ’24, respectively (7 analysts).
• Zacks projects YOY 5.2% growth and 9.8% contraction for ’23 and ’24, respectively (5).
• Value Line projects 5.3% annualized growth from ’22-’27.
• CFRA projects 5.5% YOY growth and 2.2% contraction per year for ’23 and ’22-’24, respectively.

I am discounting the one long-term estimate to get my forecast.

I forecast long-term annualized EPS growth of 1% based on the following:

• CNN Business projects 4.8% YOY and 11.2% per year contraction for ’23 and ’22-’24, respectively (based on 7 analysts), along with 5-year annualized contraction of 1%.
• MarketWatch projects annualized contraction of 10.7% and 1.9% per year for ’22-’24 and ’22-’25 (8 analysts).
• Nasdaq.com projects 21.4% YOY contraction and 2.7% annualized growth for ’24 and ’23-’25 (6, 6, and 2 analysts for ’23, ’24, and ’25, respectively).
• Seeking Alpha projects 4-year annualized contraction of 1%.
• YF projects YOY 4.8% growth and 24.7% contraction for ’23 and ’24, respectively (7), along with 5-year annualized growth of 10.4%.
• Zacks projects YOY 3.9% growth and 21.4% contraction for ’23 and ’24, respectively (6).
• Value Line projects 9.3% annualized growth from ’22-’27.
• CFRA projects contraction of 4.3% YOY and 7% per year for ’23 and ’22-’24, along with a 3-year projected CAGR of 2%.

Of four long-term estimates, two are negative. I am forecasting toward the lower end of the range (mean 4.4%)

My Forecast High P/E is 8. Over the last 10 years, high P/E has ranged from 7.2 (’22) to 30.3 (’19) with a last-5-year average (excluding NMF in ’18 and ’20) of 20.4. I am forecasting near the bottom of the range (only ’22 is lower).

My Forecast Low P/E is 4. Over the last 10 years, low P/E has ranged from 5.1 (’22) to 20.6 (’19) with a last-5-year average (excluding NMF in ’18 and ’20) of 12.8. I am forecasting below the entire range.

My Low Stock Price Forecast is the default value of $35.60. This is 21.2% less than the previous closing price and right near the 52-week low of $35.50.

Since 2014 (and excluding NMF in ’18 and ’20), Payout Ratio has ranged from 14.4% (’22) to 49.1% (’19) with a last-5-year average of 35.8%. I am forecasting below the entire range at 14%.

These inputs land AVT in the BUY zone with an U/D ratio of 3.1. The Total Annualized Return (TAR) is 12.4%.

PAR (using Forecast Average–not High–P/E) is less than I seek at 6.8%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 42 studies done in the past 90 days (seven outlier studies and my own excluded), averages for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 6.1%, 5.8%, 13.4, 9.2, and 33.7%. I am lower across the board. Value Line projects a future average annual P/E of 11 compared to MS 11.3. I am much lower at 6.

With regard to other data, MS high and low EPS are $13.40 and $7.62 compared to my $9.36 and $8.91. My low EPS may be greater than MS due the latest quarter(s) of growth and my high EPS is less due to a lower forecast growth rate. MS has a Low Stock Price Forecast of $30.10, which is 15.4% less than than mine. This does not align with the default value of 9.2 * $7.62 = $70.62 [which would be invalid]. I would argue that willingness to entertain a particular low price entails acceptance of the corresponding P/E as the lower end of the P/E range. This suggests certain studies should lower their Forecast Low P/E.

A robust MOS underlies this study, and indeed there may be “gold in them thar hills!” Given the historically inconsistent track record of sales and earnings, I would either demand a higher projected return or establish a smaller position size. I will look to buy under $41/share.