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!

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.

How does Avnet blowing away its earning jibe with your forecasts.
They guided upwards. Does not seem to make much sense.

Any thoughts?