Arrow Electronics (ARW)

Global electronics components and solutions distributor Arrow Electronics (NYSE:ARW) reported Q1 CY2025 results topping the market’s revenue expectations, but sales fell by 1.6% year on year to $6.81 billion. On top of that, next quarter’s revenue guidance ($7 billion at the midpoint) was surprisingly good and 4.4% above what analysts were expecting. Its non-GAAP profit of $1.80 per share was 25.5% above analysts’ consensus estimates.

Company Overview

Founded as a single retail store, Arrow Electronics (NYSE:ARW) provides electronic components and enterprise computing solutions to businesses globally.

Engineered components and systems companies possess technical know-how in sometimes narrow areas such as metal forming or intelligent robotics. Lately, automation and connected equipment collecting analyzable data have been trending, creating new demand. On the other hand, like the broader industrials sector, engineered components and systems companies are at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.

Competitors in the technology products and services industry include Insight Enterprises (NASDAQ:NSIT), PC Connection (NASDAQ:CNXN), and CDW Corporation (NASDAQ:CDW).

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Arrow Electronics struggled to consistently increase demand as its $27.81 billion of sales for the trailing 12 months was close to its revenue five years ago. This was below our standards and is a sign of poor business quality.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Arrow Electronics’s recent performance shows its demand remained suppressed as its revenue has declined by 13% annually over the last two years.

We can better understand the company’s revenue dynamics by analyzing its most important segments, Components and ECS, which are 70.1% and 29.9% of revenue. Over the last two years, Arrow Electronics’s Components revenue (electronic component sales) averaged 16.8% year-on-year declines while its ECS revenue (computing solutions and services) was flat.

This quarter, Arrow Electronics’s revenue fell by 1.6% year on year to $6.81 billion but beat Wall Street’s estimates by 7.2%. Company management is currently guiding for a 1.6% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 1.9% over the next 12 months. Although this projection indicates its newer products and services will catalyze better top-line performance, it is still below the sector average.

Cost of sales for an industrials business is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics.

Arrow Electronics has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 12.2% gross margin over the last five years. That means Arrow Electronics paid its suppliers a lot of money ($87.78 for every $100 in revenue) to run its business.

Arrow Electronics’s gross profit margin came in at 11.4% this quarter, marking a 1 percentage point decrease from 12.4% in the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Arrow Electronics was profitable over the last five years but held back by its large cost base. Its average operating margin of 4.2% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.

Looking at the trend in its profitability, Arrow Electronics’s operating margin might fluctuated slightly but has generally stayed the same over the last five years, meaning it will take a fundamental shift in the business model to change.

In Q1, Arrow Electronics generated an operating profit margin of 2.3%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Arrow Electronics’s EPS grew at a decent 8.4% compounded annual growth rate over the last five years, higher than its flat revenue. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t expand.

Diving into the nuances of Arrow Electronics’s earnings can give us a better understanding of its performance. A five-year view shows that Arrow Electronics has repurchased its stock, shrinking its share count by 35.1%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Arrow Electronics, its two-year annual EPS declines of 32.1% mark a reversal from its five-year trend. We hope Arrow Electronics can return to earnings growth in the future.

In Q1, Arrow Electronics reported EPS at $1.80, down from $2.41 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Arrow Electronics’s full-year EPS of $9.93 to grow 17.9%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Arrow Electronics has shown poor cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 1.9%, lousy for an industrials business.

Taking a step back, an encouraging sign is that Arrow Electronics’s margin expanded by 1 percentage points during that time. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability was flat.

Arrow Electronics’s free cash flow clocked in at $326.7 million in Q1, equivalent to a 4.8% margin. This cash profitability was in line with the comparable period last year and above its five-year average.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Arrow Electronics hasn’t been the highest-quality company lately because of its poor top-line performance, it historically found a few growth initiatives that worked. Its five-year average ROIC was 13.5%, higher than most industrials businesses.

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. Over the last few years, Arrow Electronics’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Arrow Electronics reported $231.9 million of cash and $2.84 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.07 billion of EBITDA over the last 12 months, we view Arrow Electronics’s 2.4× net-debt-to-EBITDA ratio as safe. We also see its $90.08 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Arrow Electronics blew past analysts’ revenue and EPS expectations this quarter. On the other hand, its EPS guidance for next quarter missed and its EBITDA fell short of Wall Street’s estimates. Overall, we think this was still a solid quarter with some key areas of upside. The stock traded up 1.7% to $113.09 immediately after reporting.

Updated: July 9, 2025 at 11:26 PM EDT

Before investing in or passing on Arrow Electronics, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

Arrow Electronics falls short of our quality standards. To kick things off, its revenue growth was weak over the last five years. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its diminishing returns show management's prior bets haven't worked out. On top of that, its low gross margins indicate some combination of competitive pressures and high production costs.

Arrow Electronics’s P/E ratio based on the next 12 months is 11.3x. While this valuation is fair, the upside isn’t great compared to the potential downside. There are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $116.53 on the company (compared to the current share price of $132.57).