Global electronics component distributor Avnet (US:AVT) posted fiscal fourth quarter 2023 results that surpassed market expectations, sending its stock 8.1% higher in trading on Thursday.

Avnet reported revenue of $6.56 billion for the quarter, modest 0.6% growth quarter-over-quarter and a 2.9% rise year-over-year. The highlight of the release was the adjusted earnings per share of $2.06, significantly above the estimated $1.65 expectation on $6.75 billion in sales.

Avnet has a strong  track record of beating expectations regularly. The chart below from Fintel’s earnings page for AVT shows the earnings track record of EPS against consensus expectations for the last few years.

Its Europe/Middle East/Africa business emerged as the star region within the results, clocking 18.7% growth over the previous year. North America followed with a 7.1% increase. In contrast, the company's Asia sales dipped 11.9% dip. Despite these positive demand signals in sectors like transport and broader industrial markets, Avnet’s management anticipates an inventory correction extending over the next two-to-three quarters.

While the company's flagship Components segment continued to shine with revenue of $6.1 billion, it was the Farnell specialty distribution segment that felt some headwinds. 

Farnell's sales declined 2.1% over the previous quarter with a sharp decrease in the segment operating margin by 88 basis points, primarily attributed to unfavorable mix, pricing, and foreign exchange movements.

The company's strong quarterly performance was underpinned by robust profit margins. The Components segment, despite grappling with an inventory correction, posted a healthy demand in industrial, transport, and A&D sectors.

Guiding Light Ahead

While demand signals seem to be moderating, Avnet's fiscal Q1 outlook stands well above expectations. The projected revenue for the September quarter is $6.3 billion, with a non-GAAP EPS guided at $1.50, comfortably surpassing consensus expectations.

Inventory remains a challenge, with Avnet's balance sheet showing an increase for the ninth-consecutive quarter in June, reaching $5.5 billion. However, this is part of a strategic decision, positioning the company to capitalize on long-term growth and margin objectives.

Fintel’s forward revenue forecast chart shows where analyst expectations are aligned for the upcoming years and quarters.

Analysts Weigh In

Speaking of analysts, Truist Securities'  William Stein raised his ‘hold’ call target price by a dollar to $50, but was not overly excited about the Avnet story right now. Stein reiterated that he has said for several quarters now that AVT has been “over earning” and that short order revenue and margins will eventually come down. 

The company however has outperformed even Truist’s expectations with stronger earnings for longer than they expected. On the guidance, the analyst remains skeptical of management's ability to achieve the targets and prefers other suppliers with sustainable market exposure and suggested Microchip (US:MCHP) as an example.

Fintel’s consensus target price of $48.96 suggests analysts on average see the stock rising around 10% over the next year. We think this target will drift higher in the coming weeks as models and forecasts are updated.

Fintel Metrics Show Positive Trajectory

Diving into Avnet's financial health over time using Fintel metrics on Financials, there’s a clear positive trajectory. The company’s return on assets (ROA) and return on equity (ROE) have consistently improved since 2020. 

However, the Cash ROA and Operating Cash ROA tells a different story. These metrics are calculated on an underlying and then quarter-by-quarter basis, so it is harder for the measures to be manipulated by management with creative balance sheet tricks. 

The chart below shows how these performance measures have tracked over time with traditional ROA, ROE, ROIC improving over 2022/23 while other metrics deteriorated. This begs us to question the quality of cash generating performance by the company.

While there are looming concerns about cyclical pressure and elevated inventories, Avnet's strategic positioning, diversified customer base, and ongoing initiatives promise a balanced risk-reward scenario for investors.

As the electronics industry experiences waves of change, Avnet's resilience, combined with its forward-thinking strategies, places it on a solid foundation for future growth.