In this article, we will summarize a bullish thesis posted on VIC regarding Arrow Electronics, Inc. (ARW) in July when ARW was trading at $117.71. Currently, ARW shares are trading at $121, allowing investors to invest in a well-positioned distributor with cyclical upside potential. ARW’s trailing P/E multiple is 13.5, indicating a compelling valuation considering its long-term growth prospects. Here is the summary of the thesis:
An industrial factory showcasing the manufacturing of electronics components.
Arrow Electronics, Inc. (ARW) has established its position as a powerhouse in electronic components and IT solutions, operating through two primary segments. Its Global Components segment drives the lion’s share of its sales at 77%, followed by Enterprise Computing Solutions, which contributes the remaining 23%. Over the years, the company has cemented its positioning in distributing semiconductors, IT hardware, and software. Moreover, it effectively bridges connections between suppliers and its vast customer base, spanning over 39 distribution centers across 85 countries.
Despite the evolution in the tech sphere, Arrow’s recent top-and-bottom-line results have come under duress on the back of the headwinds in the semiconductor space. However, this cyclical pattern, mirroring previous downturns, presents an excellent opportunity as Arrow’s stock trades at low multiples relative to its historical earnings power. It is imperative to consider, though, that the company’s financial performance remains cyclical, with lumpy yet countercyclical free cash flow, which effectively aligns with its robust business model. At the time of the VIC write-up, ARW was priced at $117.71 (currently trading at $121) with an earnings per share (EPS) of $10.74 for 2024, expected to rise to $15.43 in 2025. Arrow’s P/E multiple was 11, which is attractive, keeping in mind its encouraging long-term prospects.
One of Arrow’s key strengths in its business model lies in its positioning as a distributor, which alleviates any mismatches in semiconductor manufacturing timelines and customer demand visibility. Moreover, the company’s “demand creation” initiatives add value, enabling Arrow to offer design services through its 2,000 engineers who efficiently assist clients with product development. This service creates a higher-margin business model through strong supplier relationships, adding a new dimension in its distributorship.
Valuation-wise, Arrow’s mid-cycle earnings power, projected at $14.74 per share, suggests a potential upside target of $147. Some risks that add more weight to its bear case include supplier consolidation and competition from lower-margin Asian distributors. Nonetheless, given Arrow’s significant share buybacks and low trading multiple, ARW still offers meaningful upside potential as the semiconductor cycle stabilizes.
While we recognize the potential of Arrow Electronics (ARW) as an investment, our conviction leans toward the belief that select AI stocks offer even greater promise for achieving substantial returns in a shorter timeframe. If you’re interested in an AI stock with robust growth potential that trades at less than 5 times its earnings, take a look at our latest report on the cheapest AI stock to buy.
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Disclosure: None. This article was originally published at Insider Monkey.
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