Arrow Electronics Inc. in the fourth quarter hit all of its business objectives, closing the year with sales and profits well ahead of analysts’ average estimates and promising continuing expansion in the two operating divisions as demand across all regions continued to improve. With most of its major reorganization activities behind it, the company is focusing attention on further productivity gains and higher operating margin, especially in the components distribution business. Some of the expected improvements would require additional economic uptick but Arrow executives say they’ve laid already the foundation for continued margin gains.
The global electronics components distributor and information systems services provider in the final stretch of the year built on three prior quarters of solid growth and while executives were not over-bullish in their comments on 2014, they nevertheless expressed optimism about the company’s intermediate performance. The positive position was reflected in the company’s revenue forecast for the current quarter, which CFO Paul Reilly noted would certainly exceed the $4.85 billion recorded in the first quarter of 2013.
“As we look to the first quarter, we believe that total sales will be between $5.1 billion and $5.5 billion, with global components sales between $3.3 billion and $3.5 billion and global enterprise computing solutions sales between $1.8 billion and $2.0 billion,” Reilly said in a statement announcing the company’s fourth quarter results. “As a result of this outlook, we expect earnings per share, on a diluted basis, excluding any charges to be in the range of $1.14 to $1.26 per share.”
Arrow’s sales and profits have improved since the beginning of 2013 as the company began to benefit from business reorganization initiatives, including the rollout of a single information technology system in Europe that resulted in the consolidation of five inventory pools into one, acquisition gains, uptick in demand in the EU, improvements in North American sales and even faster pickup in Asia Pacific, led by China. The global economic weakness that contributed to weak performance in Europe in 2012 has also abated and the region posted the strongest percentage sales growth in the fourth quarter, according to Michael Long, chairman, president and CEO of Arrow (NYSE: ARW).
“We're pleased with our performance in 2013, as we balanced our initiatives to be more productive with continued investments to accelerate growth in sales in 2014 and beyond,” Long said while discussing the company’s results with analysts. “As we look to the first quarter, we expect no meaningful change in the markets we serve, but as we proved once again in 2013, we're able to produce strong results independent of the market environment, and we look forward to continuing this in 2014.”
Demand for electronic components and enterprise computing solutions is strengthening in all market regions – sales rose in the company’s three geographic zones in the fourth quarter – and while Long and his senior executives say they aren’t expecting a sizzling industry condition they are also satisfied with how the company can take advantage of the steady economic growth reported by other sectors. In fact, Arrow is forecasting not just sales improvements in the components business but also expects to hit its target of 5 percent in operating margins for the division in 2014.
“We continue to make pretty good progress towards the long-term goal,” Long said, responding to a question from an analyst with Stifel, Nicolaus & Co. Inc. “We feel confident that we'll return this business to the targets. We exited 30 basis points higher than 2012 and fully expect to return to 5 percent this year.”
Analysts are betting the company would be able to hit all of its goals again in the current year and have begun aligning their outlook with the management’s. A few research firms, including Brean Capital and Deutsche Bank have raised their forecasts for the company and jacked up their 52-week stock price target, to $57 and $55, respectively, according to a news report. Financial analysts on average now expect Arrow to report sales of approximately $22.8 billion for 2014 and earnings per share of $5.65, according to estimates on Yahoo.
Arrow executives said they are depending on the company’s inner workings, reorganization benefits and ability to take advantage of opportunities in the larger market to achieve their goals. The company hasn’t currently benefitted from improving demand to the extent it should normally have due to seasonal factors and the sufficient availability of products at component suppliers, for example. In previous growth cycles, higher demand across all regions coupled with tight manufacturing capacity result in longer lead times, boosting pricing and helping to raise operating margins at distributors. This time, the market has not reacted as expected, according to Arrow CEO Long.
“We haven't seen the lead times extend, as a general rule. We've seen customers get pretty much what they want when they want it,” Long said. “Although, what's kind of interesting now is you're seeing at different times different regions pick up and have a good quarter. And I would say, if you saw two regions pick up and start growing a few percentage points more, you'll start to see some stress on the demand. It's really not going to take a lot to stress the demand because there's not a lot of excess capacity out there right now because the manufacturers have been supplying products that have been really equal with the demand they have, so their ability to crank up factories is not immediate. Just a little good news in the economy or in a couple of regions will change things pretty dramatically, I believe.”
Arrow should be well-positioned for that surge in business activities if demand accelerates at a faster rate in the next quarters. The company has completed its IT unification in Europe and has begun implementing the same changes in Asia Pacific with North America scheduled for the last stage. Once the company’s legacy IT systems begin to operate on a single platform, Arrow should gain further productivity improvements to raise margins at both the components and enterprise computing solutions divisions, executives said.