AVT Stock Study (6-20-23)

Posted by Mark on July 8, 2023 at 06:51 | Last modified: June 20, 2023 09:38

I recently did a stock study on Avnet Inc. (AVT) with a closing price of $48.01. The original study is here.

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-size company has posted annualized sales and EPS declines of 2.9% and 1.0% over the past decade. 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 AVT by the Mar ’23 Manifest Investing Roundtable in what was a rather alluring 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 decreases from 2.2% in ’13 to 0.9% in ’21 before rebounding to 3.4% in ’22 with a last-5-year mean of 1.1%. This trails peer and industry averages.

ROE falls below 10.0% in ’17 and remains there until ’22 when it spikes 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 29.0%. Interest Coverage is 6.1, Quick Ratio is 1.2, and Value Line gives an A rating for Financial Strength.

With regard to sales growth:

• CNN Business projects 8.2% YOY growth and 0.8% contraction per year for ’23 and ’22-’24 (based on 7 analysts).
• YF projects YOY 8.0% growth and 9.0% contraction for ’23 and ’24, respectively (8 analysts).
• Zacks projects YOY 7.9% growth and 10.1% contraction for ’23 and ’24, respectively (5).
• Value Line projects 5.5% annualized growth from ’22-’27.
• CFRA projects 1.9% YOY contraction and 0.2% growth per year for ’23 and ’22-’24, respectively.

I am discounting the one long-term estimate to get a forecast of 2.0%.

With regard to EPS growth:

• CNN Business projects 10.4% YOY growth and 9.5% contraction per year for ’23 and ’22-’24, respectively (based on 7 analysts), along with 5-year annualized contraction of 0.4%.
• MarketWatch projects annualized contraction of 9.1% and 1.4% per year for ’22-’24 and ’22-’25 (9 analysts).
• Nasdaq.com projects contraction of 24.4% YOY and 6.6% per year for ’24 and ’23-’25 (6, 6, and 2 analysts for ’23, ’24, and ’25, respectively).
• Seeking Alpha projects 4-year annualized contraction of 0.4%.
• YF projects YOY 10.0% growth and 25.9% contraction for ’23 and ’24, respectively (8), along with 5-year annualized growth of 10.4%.
• Zacks projects YOY 10.1% growth and 24.4% contraction for ’23 and ’24, respectively (6), along with 5-year annualized growth of 14.4%.
• Value Line projects 9.3% annualized growth from ’22-’27.
• CFRA projects contraction of 22.4% YOY and 6.9% per year for ’23 and ’22-’24, along with a 3-year CAGR of 2.0%.

Two of five long-term estimates are negative. I am forecasting toward the bottom of the range (mean 6.7%) at 2.0%. Also to be conservative, I am using ’22 EPS of $6.94/share as the initial value rather than ’23 Q3 [FY ends June] $9.10 (annualized).

My Forecast High P/E is 11.0. Over the past decade, high P/E has ranged from 7.2 (’22) to 30.3 (’19) with a last-5-year mean (excluding NMF in ’18 and ’20) of 20.4. Last-5-year-mean average P/E is 16.6. I am forecasting near the bottom of the range (only ’22 is lower).

My Forecast Low P/E is 5.0. Over the past decade, low P/E has ranged from 5.1 (’22) to 20.6 (’19) with a last-5-year mean (excluding NMF in ’18 and ’20) of 12.8. I am forecasting below the entire range.

My Low Stock Price Forecast (LSPF) is the default value of $34.70 (based on $6.94/share initial value). This is 27.7% less than the previous closing price and 2.3% less than the 52-week low.

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 mean of 35.8%. I am forecasting below the entire range at 14.0%.

These inputs land AVT in the HOLD zone with a U/D ratio of 2.7. Total Annualized Return (TAR) is 13.2%.

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 only 56 studies over the past 90 days (my study and 15 outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 5.8%, 6.2%, 11.0, 4.1, and 35.6%, respectively. I am greater than or equal on Forecast High/Low P/E and lower on the other three inputs. Value Line projects an average annual P/E of 11.0, which is higher than MS (7.6) and mine (8.0).

MS high and low EPS are $11.61/share and $8.46/share versus my $7.66 and $6.94. My high EPS is lower due to a lower EPS growth rate. My low EPS is lower because many studies used initial values of Q2 or Q3 ’23, which is more aggressive.

MS LSPF of $29.40 implies a low P/E of 3.5 (vs. the above-stated 4.1). This is 15.3% less than the $8.46 * 4.1 = $34.69 default value [and my LSPF as well], which results in more conservative zoning.

PEG ratio is another value check I have recently begun to monitor. PEG is 0.44 (Zacks) where 1.50 is generally regarded as the upper limit. This is the first time I have seen a number below 1.00. I will continue to monitor to get a feel for the range.

Despite the low MS sample size and my comparable P/E range, MOS seems robust in the current study.

Two things give me pause about stock purchase in the BUY zone under $47/share. First, contraction is projected over the next 1-2 years. I discounted ’23 EPS growth from my analysis but a case could be made to discount more, which might further lower the BUY threshold. Second, any holding would speculative because the company did not pass the visual inspection. A smaller position size would therefore be prudent.

With the stock up ~18.0% in the last 30 days and near 52-week highs, I would wait for a [arbitrary] 10% pullback to invest.