ARW Stock Study (9-16-24)

I recently did a stock study on Arrow Electronics, Inc. (ARW) with a closing price of $124.35. The previous study is here.

M* writes:

     > Arrow Electronics Inc. is a provider of products, services, and
     > solutions to industrial and commercial users of electronic
     > components and enterprise computing solutions. It has one of the
     > world’s broadest portfolios of product offerings available from
     > electronic components and enterprise computing solutions suppliers,
     > coupled with a range of services, solutions, and software, the
     > company helps industrial and commercial customers introduce
     > products, reduce their time to market, and enhance their overall
     > competitiveness. The company has two business segments, the
     > components business and the enterprise computing solutions.

Over the last 10 years, this large-size company grows sales and EPS at annualized rates of 5.4% and 17.8%, respectively (’19 excluded from the full analysis due to negative EPS). Lines are somewhat up, cyclical, and parallel with YOY EPS decline in ’17 and sales+EPS declines in ’20 and ’23. Five- and 10-year EPS R^2 are 0.36 and 0.88, respectively, and Value Line gives an Earnings Predictability score of 60.

Over the past decade, PTPM leads peer and industry averages while ranging from 2.6% in ’17 and ’20 to 5.1% in ’22 with a last-5-year mean of 3.9%. ROE leads peer and industry averages while increasing from 11.3% (’14) to 15.5% (’23) with a last-5-year mean of 17.9%. Debt-to-Capital is higher than peer and industry averages while ranging from 30.7% in ’20 to 40.5% in ’22 with a last-5-year mean of 36.0%.

Quick Ratio is 0.98 and Interest Coverage 3.4 per M*. Value Line gives a B++ grade for Financial Strength.

With regard to sales growth:

• YF projects YOY 16.3% contraction and 4.9% growth for ’24 and ’25, respectively (based on 7 analysts).
• Zacks projects YOY 15.9% contraction and 4.2% growth for ’24 and ’25, respectively (4 analysts).
• Value Line projects 2.2% annualized growth from ’23-’28.
• CFRA projects contraction of 16.0% YOY and 6.0% per year for ’24 and ’23-’25, respectively.

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

With regard to EPS growth:

• MarketWatch projects 2.6% contraction/year and 6.0% growth/year for ’23-’25 and ’23-’26 (based on 9 analysts).
• Nasdaq.com projects growth of 36.2% YOY and 5.1% growth/year for ’25 and ’24-’26 [5/5/1 analyst(s) for ’24/’25/’26].
• Seeking Alpha projects 4-year annualized contraction of 1.4%.
• YF projects YOY 36.7% contraction and 35.5% growth for ’24 and ’25 and 5-year annualized contraction of 1.7% (6).
• Zacks projects YOY 37.3% contraction and 36.2% growth for ’24 and ’25, respectively (5).
• Value Line projects 11.9% annualized growth from ’23-’28.
• CFRA projects contraction of 35.5% YOY and 4.7% per year for ’24 and ’23-’25.

My forecast of flat growth is around middle of the range with two of three long-term estimates being negative (mean: +2.9%). I will use ’23 EPS of $15.84/share as high EPS (initial value) and 2024 Q2 EPS of $10.61 (annualized) as low EPS.

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-5-year mean of 9.5 and a last-5-year-mean average P/E of 7.6. I am near bottom of the high P/E range (only ’22 is less).

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 5.6. I am forecasting near bottom of the range [only ’22 and ’20 (5.3) are less].

My Low Stock Price Forecast (LSPF) is $98.00. Default based on low EPS from above seems unreasonably low at 48.8% (41.3%) less than the previous close (52-week high). My arbitrary forecast is 21.1% and 9.7% less, respectively.

These inputs land ARW in the HOLD zone with a U/D ratio of 0.7. Total Annualized Return (TAR) is 2.8%.

PAR (using Forecast Average—not High—P/E) is -0.9%, which is a SELL for any size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on the total annualized return (TAR) of 2.8% instead but even that is less than the current yield on T-bills.

To assess MOS, I would normally start with Member Sentiment but only four other studies have been done in the past 90 days. This is too small a sample for comparison and an indication of “nothing to see here.”

MOS is robust because my inputs are near or below respective analyst/historical ranges. My high EPS of $15.84/share is much lower than Value Line’s $30.00. Value Line also projects a higher future average annual P/E (8.0 versus my 7.5).

I think the picture painted here is one of a low-quality company. Visual inspection is weak (cyclical). Estimates for sales and EPS growth are minimal. Interest Coverage is low. Especially for a large-size company, long-term estimates are lacking (only three data sources). Default LSPF is in need of an override.

Value Line offers one caveat: “Arrow Electronics may be at the nadir of its business cycle.” If true, then things will get better going forward—at least to allow for a more complete SSG.

Per U/D, ARW is a BUY < $109. BI TAR criterion is met ~ $71/share based on forecast high price ~ $143 (no dividend).

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