Investing In Embedded Solutions And Digital Capabilities Will Drive Future Opportunities

Key Takeaways

• Focus on higher-margin offerings and inventory optimization positions Avnet well for improved revenue and net margins.
  
• Investments in digital capabilities and partnerships enhance revenue growth and operational efficiency, boosting margins and EPS.
  
• Declining sales in key regions, geopolitical challenges, competitive pressures, and market shifts towards lower-margin areas could negatively affect Avnet's future revenues and profits.

Catalysts

Distributes electronic component technology.

• Avnet is focusing on optimizing inventory and managing costs while investing in business and operational capabilities, positioning itself well for market recovery. These efforts are likely to improve both revenue and net margins in the future.
  
• The company's focus on higher-margin offerings such as embedded solutions, demand creation, and IP&E products is expected to drive future growth and improve gross margins.
  
• Continued investments in digital capabilities, including leveraging existing Avnet customer relationships and driving e-commerce growth, are expected to enhance revenue and reduce operating expenses, thereby improving net margins.
  
• Avnet is on track to reduce outstanding shares by at least 5% this fiscal year, which should contribute to significant growth in EPS, assuming share repurchase goals are met.
  
• Expanding partnerships with suppliers to increase market share and emphasizing the value of distribution through its supply chain services are expected to drive future revenue growth.

Avnet Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Avnet's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.4% today to 2.2% in 3 years time.
• Analysts expect earnings to reach $544.0 million (and earnings per share of $6.38) by about March 2028, up from $317.7 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 9.4x on those 2028 earnings, down from 13.3x today. This future PE is lower than the current PE for the US Electronic industry at 21.5x.
• Analysts expect the number of shares outstanding to decline by 4.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.08%, as per the Simply Wall St company report.

Avnet Future Earnings Per Share Growth

Risks

• The company's results showed a decline in sales year-over-year in key regions such as EMEA and the Americas, which could negatively impact future revenues if not addressed.
  
• The geopolitical factors in EMEA and weak consumer confidence are creating a challenging economic backdrop, thereby affecting revenue and profit margins.
  
• Competitive pricing pressures, particularly in the Farnell segment, are impacting profitability, leading to decreased margins and earnings.
  
• The market correction and uncertain recovery timeline pose risks to revenue and profits, as the prolonged cycle creates challenges in inventory management and demand forecasting.
  
• The mix shift towards Asia with lower gross margins is affecting overall operating margins, potentially impacting earnings if the trend continues.

Valuation

• The analysts have a consensus price target of $52.25 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 2028, revenues will be $24.4 billion, earnings will come to $544.0 million, and it would be trading on a PE ratio of 9.4x, assuming you use a discount rate of 9.1%.
• Given the current share price of $48.8, the analyst price target of $52.25 is 6.6% 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.