ARW Stock Study (9-21-23)

Posted by Mark on December 20, 2023 at 07:00 | Last modified: September 21, 2023 14:46

I recently did a stock study on Arrow Electronics, Inc. (ARW) with a closing price of $127.90.

Value Line writes:

     > Arrow Electronics, Inc. is a global distributor of electronic
     > components and computer products to industrial and commercial
     > customers. Has over 220 selling locations and 43 distribution
     > centers in more than 90 countries and territories. Semiconductor
     > and computer products in ’22 accounted for 78% and 22%, resp.,
     > of sales. Geographic sales: Americas, 39%; Europe, 30%;
     > Asia/Pacific, 31%. Acquired: Circle IT, ’21; eInfochips, ’18;
     > EE times, ’16; immixGroup, ’15; Nu Horizons, ’11.

Over the past decade, this large-size company has grown sales and EPS at annualized rates of 6.0% and 18.0%, respectively (I am excluding ’19 EPS of -$2.44 from my analysis as Value Line and CFRA both normalize as a nonrecurring event). Lines are up, straight, and narrowing except for sales dips in ’19 and ’20 and EPS declines in ’17 and ’20. PTPM is greater than peer and industry averages and recently trending higher, increasing from 2.7% (’13) to 5.1% (’22) with a last-5-year mean of 3.8%.

Also over the past decade, ROE leads peer and industry averages while trending up from 9.6% (’13) to 24.6% (’22) with a last-5-year mean of 17.3%. Debt-to-Capital is higher than peer and industry averages, however, ranging from 30.7% in ’20 to 40.5% in ’22 with a last-5-year mean of 36.4%.

Interest Coverage is 6.7 and Quick Ratio is 2.1. Value Line gives an A rating for Financial Strength.

With regard to sales growth:

• CNN Business projects contraction of 7.3% YOY and 5.3% per year for ’23 and ’22-’24 (based on 7 analysts).
• YF projects YOY contraction of 9.8% and 4.7% for ’23 and ’24, respectively (7 analysts).
• Zacks projects YOY contraction of 10.0% and 5.5% for ’23 and ’24, respectively (4).
• Value Line projects 2.5% annualized growth from ’22-’27.
• CFRA projects contraction of 9.8% YOY and 7.6% per year for ’23 and ’22-’24, respectively.

I am discounting the long-term estimate to 0% due to unanimous projection of short-term contraction.

With regard to EPS growth:

• CNN Business projects contraction of 26.2% YOY and 16.5% per year for ’23 and ’22-’24, respectively (based on 7 analysts), along with 5-year annualized contraction of 5.1%.
• MarketWatch projects annualized contraction of 18.0% and 2.6% for ’22-’24 and ’22-’25, respectively (8 analysts).
• Nasdaq.com projects contraction of 8.1% YOY and 17.7% growth per year for ’24 and ’23-’25, respectively [5, 5, and 1 analyst(s) for ’23, ’24, and ’25].
• Seeking Alpha projects 4-year annualized contraction of 5.1%.
• YF projects YOY contraction of 27.5% and 7.5% for ’23 and ’24, respectively (7), along with 5-year annualized contraction of 8.1%.
• Zacks projects YOY contraction of 28.2% and 8.1% for ’23 and ’24, respectively (5), along with 5-year annualized growth of 4.0%.
• Value Line projects 5.0% annualized growth from ’22-’27.
• CFRA projects contraction of 27.7% YOY and 18.1% per year for ’23 and ’22-’24.

Three of five long-term estimates are negative (mean: -1.9%). I am forecasting below at -3.0% per year. I will use 2023 Q2 EPS of $19.65/share (annualized) as the initial value for high EPS rather than ’22 EPS of $21.80. For low EPS, I will use ’21 EPS of $15.10 (arbitrary).

My Forecast High P/E is 9.0. Over the past decade, high P/E ranges from 6.3 in ’22 to 18.9 in ’17 with a last-10-year median of 12.7 and a last-5-year-mean average P/E of 7.9. The last-5-year mean is 9.9. I am forecasting below the latter (not particularly conservative).

My Forecast Low P/E is 6.0. Over the past decade, low P/E ranges from 4.1 in ’22 to 15.3 in ’17 with a last-5-year mean of 5.9. I am forecasting just above the latter (not conservative).

My Low Stock Price Forecast (LSPF) of $90.60 is default based on $15.10/share initial value. This is 29.2% less than the previous closing price but 1.3% above the 52-week low.

These inputs land ARW in the HOLD zone with a U/D ratio of 0.7. Total Annualized Return (TAR) is 3.6%.

PAR (using Forecast Average—not High—P/E) is negative, which is likely a SELL anytime I see it. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead but even that is less than the current yield on T-bills.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 4 studies (my study and 2 outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 5.0%, 5.1%, 9.6, and 7.7, respectively. I am lower across the board. Value Line’s projected average annual P/E of 8.0 is lower than MS (8.7) but higher than mine (7.5).

MS high/low EPS are $28.25/$19.66 vs. my $16.87/$15.10 (per share). Value Line’s high EPS is $28.50. I am far below either.

MS LSPF of $68.50 implies a Forecast Low P/E of 3.5, which is substantially less than the above-stated 7.7. MS LSPF is 54.8% less than the default $19.66/share * 7.7 = $151.38 (invalid on today’s date), which results in more conservative zoning. MS LSPF is also 32.3% less than mine. This does not give me confidence in MS estimates given the tiny sample size (4).

My TAR (I prefer >15.0%) is much less than the 14.9% from MS. Again, this shouldn’t factor much into my MOS assessment due to the tiny sample size.

I categorize MOS as moderate. My inputs are at or below the averages. My initial values seem adequately discounted.

I track a few different valuation metrics. PEG is 2.0 and 2.2 per Zacks and my projected P/E, respectively: both overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is undervalued at 0.82. Kim Butcher’s “quick and dirty DCF” prices the stock at 6.5 * [$33.30 – ($0.00 + $2.50)] = $200.20, which suggests the stock to be 36.1% undervalued. These last two metrics are encouraging [if I could believe in them; the three metrics rarely align].

Based on this study, ARW is a BUY under $105/share. To meet my personal TAR criterion, I need closer to $76. As I said the other day with regard to MKSI, for me to feel good about investing in this stock I need to see a more convincing outlook for EPS growth, which I don’t currently have.

I think an argument can be made to terminate the analysis upon seeing a negative mean long-term-EPS-growth projection. Just like we require passing of visual inspection for a core position, we should expect to see a positive EPS outlook. If that is not available, then it’s certainly not a “high-quality growth stock” and maybe it’s just not the right time to invest. For cyclical industries, I would think every negative quarter that passes is one quarter closer to growth.