What a fantastic six months it’s been for Arrow Electronics. Shares of the company have skyrocketed 81.9%, hitting $209.50. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Arrow Electronics, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Arrow Electronics Will Underperform?
We’re happy investors have made money, but we’re swiping left on Arrow Electronics for now. Here are three reasons we avoid ARW, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Arrow Electronics grew its sales at a sluggish 1.8% compounded annual growth rate. This was below our standards.
2. EPS Took a Dip Over the Last Two Years
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Sadly for Arrow Electronics, its EPS declined by 1.5% annually over the last two years while its revenue grew by 3.5%. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
Over the last few years, Arrow Electronics’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Arrow Electronics falls short of our quality standards. After the recent surge, the stock trades at 11.2× forward P/E (or $209.50 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. Let us point you toward one of our top digital advertising picks.
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