Large Cap Watch List
We asked, but no one answered. So we are taking our own counsel and breaking our Watch List into three portfolios: Small Cap, Mid Cap and Large Cap. Each will be tracked against the relevant S&P index going forward from their collective inception date of January 31 (priced at the close of market trading that day.)
For your viewing pleasure, the Large Cap Watch List (Track at Marketocracy) (to be measured against the S&P 500) follows.
Astute observers will notice less overlap between this watch list and the names in the Small Cap Watch List and Mid Cap Watch List. This was not for lack of overlap, as the smallest S&P 500 name has a market capitalization of $600 million, which would allow for complete overlap with the Mid Caps if we chose. Instead we selected an arbitrary low of $2 billion for large-cap names, which cuts off five names that are actually in the S&P 500.
In addition, we will provide a “quick and dirty” analysis of each name, with a goal of one such analysis per day. As the name implies, the quick and dirty analysis will be incomplete. We are hoping you will join in the debate and fill the gaps in our analysis.
Hi,
How does Avnet blowing away its earning jibe with your forecasts.
They guided upwards. Does not seem to make much sense.
Any thoughts?
Joe,
Thanks for your comment. I apologize for the slow reply, but was out of town.
As per their corporate fact sheet, Avnet gets about two thirds of its business from distributing electronic parts and the other third from technology services. Of the two thirds, the parts include not only semiconductors (on which we have a strong opinion that there is looming overcapacity) and other parts such as connectors and other components (on which we have no strong opinion.) As evidenced by Amphenol (APH), the connectors business is very strong as of now.
In their earnings press release, Avnet said “While year over year revenue growth slowed to 3.5% this quarter, we were able to grow operating income eight times faster than revenues for the quarter.” So a big chunk of the performance is margin expansion, which is less sustainable than revenue-driven earnings since there is a limit to how high margins can get. Ultimately earnings will grow at closer to the meager 3.5% revenue growth rate, and given the industry cyclicality they will decline again at some point in the future.
On a positive note, management also said “‘Electronics Marketing delivered another quarter of significant year over year margin expansion. While revenue growth was dampened by a relatively mild component industry correction, our gross profit margin at EM was up on both a sequential and year over year basis. During the quarter, EM reduced inventory by $51 million sequentially in reported U.S. dollars or approximately $67 million in constant dollars. With inventory managed back to desired levels and our margins improving, we believe EM is well positioned to drive further earnings improvement as we enter our seasonally strong March quarter.’” The inventory reduction, if semiconductor prices decline as we expect, will allow them to restock with cheaper components.
Hope that helps.
Thanks Trent.
To your last point, cheaper components mean less margin dollars (assuming generally fixed margins) and customers will demand reductions. So they will need to sell more components to maintain the same margin dollars.
Companies such as APH started passing along price increases about a year ago, under the guise of rising commodity prices. These increases have stuck.
Thanks for taking the time to respond!