Over the past six months, Arrow Electronics has been a great trade, beating the S&P 500 by 9.4%. Its stock price has climbed to $145.87, representing a healthy 15.1% increase. This was partly thanks to its solid quarterly results, and the run-up 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? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Arrow Electronics Will Underperform?
Despite the momentum, we're sitting this one out for now. Here are three reasons why ARW doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Arrow Electronics’s 1.5% annualized revenue growth over the last five years was weak. This fell short of our benchmarks.
2. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Arrow Electronics’s EPS grew at 7.1% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 1.5% 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
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 significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Arrow Electronics falls short of our quality standards. With its shares topping the market in recent months, the stock trades at 11.4× forward P/E (or $145.87 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are more exciting stocks to buy at the moment. We’d suggest looking at our favorite semiconductor picks and shovels play.
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