Cost Reduction And AI Initiatives Will Fuel Future Success

Key Takeaways

• Cost reduction and digital automation initiatives at Avnet are expected to improve net margins and enhance market share.
  
• Expansion in AI-related projects in Asia Pacific and strategic share buybacks aim to drive revenue and boost EPS.
  
• Declining sales and margins in key regions, coupled with inventory challenges, threaten Avnet's revenue growth and earnings potential.

Catalysts

Distributes electronic component technology.

• Avnet is focusing on reducing inventory levels and balancing this with near-term market opportunities, which can lead to improved cash flow and balance sheet management, impacting earnings positively as inventory days target moves to the 80s.
  
• The company is seeing signs of recovery and growth in the Asia Pacific region, particularly in AI-related server and data center projects, which could enhance revenue growth as these emerging sectors expand.
  
• Cost reduction initiatives, especially at Farnell and within SG&A, are expected to continue, driving operational efficiencies that can improve net margins as market conditions stabilize.
  
• Avnet is leveraging its digital automation capabilities and expanding its IP&E business, potentially leading to increased market share and revenue growth as they better serve the mass market and utilize technological advancements.
  
• Share buyback initiatives and efforts to reduce share count by at least 5% this fiscal year are positioned to enhance EPS as the company allocates capital effectively to provide consistent shareholder returns.

Avnet Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Avnet's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.5% today to 2.0% in 3 years time.
• Analysts expect earnings to reach $497.0 million (and earnings per share of $5.81) by about December 2027, up from $348.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.9x on those 2027 earnings, down from 13.3x today. This future PE is lower than the current PE for the US Electronic industry at 26.0x.
• Analysts expect the number of shares outstanding to decline by 0.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.72%, as per the Simply Wall St company report.

Avnet Future Earnings Per Share Growth

Risks

• Avnet's financial performance in the Americas and EMEA has been declining, with EMEA sales down 28% and Americas down 16% year-over-year, which could negatively impact overall revenue growth.
  
• The company's gross margin decreased due to a higher sales mix from the Asia region, which has lower margins. If this trend continues, it could adversely affect net margins.
  
• The Farnell division faced significant challenges, with an 18% decline in sales year-over-year and pressure due to the EMEA macro environment. Continued underperformance could hamper Avnet's earnings.
  
• Weakness in the industrial and automotive markets, along with a soft economic backdrop in the EMEA region, poses risks to Avnet's revenue from these segments.
  
• Inventory increases, primarily driven by foreign currency exchange rates and changes in working capital, could stress cash flow and impact Avnet's ability to improve their net earnings.

Valuation

• The analysts have a consensus price target of $54.17 for Avnet based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $64.0, and the most bearish reporting a price target of just $45.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $25.5 billion, earnings will come to $497.0 million, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 8.7%.
• Given the current share price of $53.1, the analyst's price target of $54.17 is 2.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.