Over the past six months, Arrow Electronics’s stock price fell to $116.66. Shareholders have lost 9.4% of their capital, which is disappointing considering the S&P 500 has climbed by 8.2%. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Arrow Electronics, or should you be careful about including it in 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?
Even with the cheaper entry price, we don't have much confidence in Arrow Electronics. Here are three reasons there are better opportunities than ARW and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Arrow Electronics grew its sales at a weak 1.3% compounded annual growth rate. This fell short of our benchmarks.
2. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Arrow Electronics’s EPS grew at an unimpressive 7% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 1.3% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Arrow Electronics’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
We see the value of companies helping their customers, but in the case of Arrow Electronics, we’re out. After the recent drawdown, the stock trades at 10.5× forward P/E (or $116.66 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better investments elsewhere. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
Stocks We Would Buy Instead of Arrow Electronics
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