Investidea: Arrow Electronics, because the deficit will be eternal

Инвестидея: Arrow Electronics, потому что дефицит будет вечным

Today we have a speculative idea: take shares in high-tech reseller Arrow Electronics (NYSE: ARW), in order to capitalize on the growth of profitability of his business.

Growth potential and validity: 16% behind 14 Months; 9% per annum during 15 years.

Why stocks can go up: потому что чипы и электроника долго будут востребованными.

How do we act: we take shares now by 130,06 $.

When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.

No guarantees

Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.

And what is there with the author's forecasts

Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.

So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.

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What the company makes money on

The company finds the necessary components and software for customers – it acts as an intermediary reseller in the field of high-tech production. The magazine published an overview of the company's business, so we won't repeat ourselves here..

The three most important moments for today's idea:

  1. The company's clients are largely machine-building, assembly and design plants, and also resellers.
  2. Almost a third of the company's sales are made in East Asia.
  3. The main money of the company comes from the semiconductor industry.

Инвестидея: Arrow Electronics, потому что дефицит будет вечным

Arguments in favor of the company

empty shelves. This year, two trends played into the hands of the company:

  1. Semiconductor shortage: much less chips, what everyone needs, and there is no solution in sight.
  2. Problems of many industrial enterprises with supply: the necessary components and raw materials are not always and everywhere in sufficient quantities and they rarely come on time.
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In such conditions, the services of intermediaries such as Arrow are in great demand. Scarcity situation like chips, so high-tech components will soon become the norm due to the constant coronacrisis disorders. Therefore, Arrow will be able to maintain increased revenue levels, margins and profits — and, maybe, even increase them.

Certainly, it's a hypothesis, but I think, that it is reasonable enough, given the context: the pandemic and new strains will inevitably lead to disruptions in supply further.

Dividends – maybe. The company does not pay dividends, but, given the dynamics in its industry, may well enter them. For example, Synnex plans to double existing payouts.

Taking into account the growth of profitability of its business, Arrow could well introduce a dividend of, say, 6 $ per share per year - which would give a higher yield 4% per annum. May be, the company will do it voluntarily, maybe, an investor-activist will appear, which will force her to do so. I believe, that the second option is the most likely.

Cheap. The company is not very expensive - its capitalization is slightly less than $ 9 billion, and the multipliers in general don't look sky-high: P / It's about 10, P / S — 0,29. This can attract investors to the stock, who want to "make money on semiconductors", but who are deterred by the sky-high P / E companies like Nvidia.

Can buy. Given all of the above and the hype in the semiconductor industry, the company may well be bought by some semiconductor giant - in order to expand and diversify its business at the expense of the service sector., not directly related to the design, production, assembling the chips themselves.

Antitrust Abuses Prevent Nvidia from Buying Arm, and this situation will prevent Nvidia from developing the most marginal areas of its business.. She can decide, that a business like Arrow would be a worthwhile investment.

Although the buyer can be anyone. Quite possibly, that it will be a private foundation, who wants his share in the important semiconductor business for modern civilization, but who is afraid to invest tens of billions of dollars in R&D and the construction of factories in more marginal industries.

What can get in the way

Forty varieties of chips. Supply problems for manufacturing enterprises are now not so acute, like a month ago. This could be a signal, that Arrow's negotiating position is no longer as strong, And, maybe, it will stop setting revenue and profit records for the next few quarters.

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It has a very small final margin — a little less. 3% from proceeds, — so that its reporting will be very sensitive to changes in the dynamics of demand from customers.

I do not think, that it's going to ruin it all in the long run.. Still, the fundamental prerequisites for the eternal deficit are very strong. But at a distance of six months to a year, alleviating the logistical problems of customers can negatively affect Arrow's profits..

It also happens. Logistical problems can affect the business of Arrow itself not in the best way: in conditions of scarcity, it may not find the right goods in the right quantity, it also has to endure rising logistics costs.. Is it so, we will find out in the company's report, which comes out today.

Crimson Peak. Now the company's shares are trading near its historical highs.. So they can fall hard, regardless of the strong foundation of the business, especially if investors are disappointed by today's report.

Chinese lameness. Given Washington's mood to crush the Chinese high-tech industry, one should be wary of the resumption of the trade war between the US and China. War Could Hurt Arrow's Business in the Pacific.

Not up to dividends. The company has just over $2 billion in long-term debt — and that will prevent it from paying enough dividends.. Furthermore, i would expect, that the company will decide to invest the resulting "super profits" in the expansion of the business: this will be absolutely correct from the point of view of the development of Arrow as an enterprise. But it will interfere with our short-term speculative investor goals..

What's the bottom line?

We take shares now by 130,06 $. And then there are the following options:

  1. we wait, when stocks rise to 150 $. Think, what will happen next 14 Months;
  2. we hold the following shares 15 years, while the company becomes a high-tech resale giant and, I hope, introduces generous dividends.

Overall, I don't see any terrible fundamental problems for this business.. There are two main questions here..

Firstly, how long and acute the logistics crisis will be. I think, that it will not end until then, until the pandemic ends, - may be, not in our lifetime. But seasonal "thaw" is possible, which can adversely affect Arrow reporting. Or maybe not affect: enterprises have now become frightened and motivated to buy for the future, not "as needed".

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Secondly, how predisposed Arrow's management is to share money with shareholders in the form of dividends. There is some possibility, that there will never be enough dividends here, and the money will go to business development and debt repayment. It's not fatal., but still, dividends will add more attractiveness to the stock.

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