Set Your Sights on Arrow Electronics, Focus for the Long Run

Virus-related business closures have everybody on edge. There's no clarity on how long business shut-downs will last or the exact damage that will have been inflicted when things start getting back to normal. Stock traders hate uncertainty. The past few weeks have definitely created more of that than perhaps ever before. No wonder the CitiGroup Panic/Euphoria Model registered its lowest ratings of the year recently. The good news is that readings like that support a 95% chance of higher prices over the following 12-months. The last three times the indicator hit the panic button, we saw near-term rallies as well. Knowing that, it just makes sense to be a buyer, rather than a seller, of high-quality shares, which were knocked way down due to general market action. Arrow Electronics is a world leader in distribution of almost everything related to electronic components and computer products. It posted almost $29 billion in 2019 revenues, while earning $7.50 per share. Despite its many positive attributes, ARW plunged in 2020 pretty much line with the indexes. It dropped from $85.80 last January to south of $40 on March 23. That took it from slightly pricier than typical, to its lowest absolute price since 2013. Like the broad market, ARW bounced back a bit since. It closed out last week at $50.23. That's a 42% discount from its 52-week high. Arrow's corporate metrics rank high across the board. It boasts a fine balance sheet and outperformed most other stocks in Value Line's other three measured qualities. Those ratings were well-earned. From 2010 through 2019, ARW more than doubled its sales, cash flow and book value per share. EPS climbed by almost 82%. Continuous shareholders did well, even at today's depressed price point. It's true, 2020's results will be hard to estimate until the coronavirus' effects taper off. The best way to value Arrow is to look out to projected 2021 results and work backwards. Analysts have already trimmed earnings estimates for next year -- 2021 -- from $9.30 to $8.20 assuming a dip in 2020 followed by just a partial rebound. From 2014 through 2019, ARW's average multiple ran about 9.6-times. Assuming that recurs by Dec. 31, 2021 supports a conservative 22-month target price of nearly $79. Hitting that very modest goal would provide a 56.7% gain. Why do I call that target modest? ARW gave traders chances to exit between $84 and $87 during each of the four years 2017 through 2020 YTD. By 2021, Arrow's sales, cash flow, earnings and book value will all likely be at, or approaching, all-time records. There's no reason to believe the shares won't be setting new record highs as well. Yahoo Finance is in general agreement. It sees $8.20 in EPS by 2021 and calls for ARW to hit a 12-month target price of $67.88, even with coronavirus disruptions figured in. That goal assumes only a sub-par 8.3-times price-to-earnings on Yahoo's already reduced 2020 estimate. Independent research house Morningstar is more bullish than either Yahoo Finance or I am. Morningstar sees ARW being worth a fair value of $84 right now. That implies greater than 67% upside from its Friday quote. You rarely get chances to buy fine companies like ARW near multi-year lows. Prior to last week's selloff ARW hadn't changed hands for under $62 since 2016. The company holds more cash and receivables than its entire debt load. As of Dec. 31, 2019 it even showed a small surplus in its defined benefit plan. There are no preferred shares outstanding. Value Line's 2023 - 2025 projected price range for Arrow stood at $95 - $140 per share in its latest full page report, released on Friday. Production of computers and other electronic devices appears sure to rise over time. Arrow Electronics is poised to capture at least its share of that expanding market. Value Line sees ARW's EPS rising to about $13 not later than five years out. Buy some ARW here, near $50, while the mood is still bleak.

Set Your Sights on Arrow Electronics, Focus for the Long Run

When others panic and sell, smart traders buy names such as ARW.

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