- By GF Value
The stock of Arrow Electronics (NYSE:ARW, 30-year Financials) shows every sign of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $117.5 per share and the market cap of $8.7 billion, Arrow Electronics stock is believed to be significantly overvalued. GF Value for Arrow Electronics is shown in the chart below.
Because Arrow Electronics is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 7.2% over the past three years and is estimated to grow 3.23% annually over the next three to five years.
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Arrow Electronics has a cash-to-debt ratio of 0.17, which which ranks in the bottom 10% of the companies in Hardware industry. The overall financial strength of Arrow Electronics is 5 out of 10, which indicates that the financial strength of Arrow Electronics is fair. This is the debt and cash of Arrow Electronics over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Arrow Electronics has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $28.7 billion and earnings of $7.5 a share. Its operating margin is 3.18%, which ranks in the middle range of the companies in Hardware industry. Overall, GuruFocus ranks the profitability of Arrow Electronics at 7 out of 10, which indicates fair profitability. This is the revenue and net income of Arrow Electronics over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Arrow Electronics is 7.2%, which ranks better than 70% of the companies in Hardware industry. The 3-year average EBITDA growth rate is 7%, which ranks in the middle range of the companies in Hardware industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Arrow Electronics's return on invested capital is 9.13, and its cost of capital is 10.21. The historical ROIC vs WACC comparison of Arrow Electronics is shown below:
In summary, Arrow Electronics (NYSE:ARW, 30-year Financials) stock is estimated to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in Hardware industry. To learn more about Arrow Electronics stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
This article first appeared on GuruFocus.