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Should You Buy It? Arrow Electronics for Your Quiver

David Peltier

Arrow Electronics(ARW Quote) has outperformed the broader market over the past year, but do its shares still hold value at current levels? Should you buy it?

The company, one of the world's largest distributors of electronic components and computer products, raised its earnings forecast last month to reflect higher demand. Arrow said it now sees fourth-quarter earnings of 92 to 97 cents a share, up from previous guidance of 90 to 95 cents.

Similarly, management now expects quarterly sales of $4.25 billion to $4.45 billion, as demand in the core components business was stronger than expected. The company, which generates about 50% of its total revenue overseas, usually posts its full fourth-quarter results in mid-to-late February.

The stock gained about 25% in 2007, but at Wednesday's closing price of $38.80, Arrow is 14% off its October highs. At current levels, the shares are also valued at just 10.5 times expected 2008 earnings of $3.68 a share. That compares favorably with the 11.4% earnings growth the company is expected to post next year, on top of 12.5% in 2007.

And Arrow's growth is coming both organically and from acquisitions. For one thing, the company's computer products division, which is benefiting from rising server demand and carries higher margins, has grown to 29% of total revenue in the third quarter, compared with 20% in 2006.

Arrow also announced five acquisitions over the past year, including four overseas. Management has said lately that it continues to pursue niche acquisitions in Asia that would likely be accretive to earnings.

Arrow's management apparently sees value in the stock at current levels, given the $100 million the company added to its share-repurchase program Dec. 11. Arrow is now authorized to buy back about $116 million, or 3 million shares, at these prices.

The company can comfortably fund its repurchase program, which came in at $918 million over the past four quarters. Arrow also has a stable balance sheet with a 16.5% debt-to-total-assets ratio and no long-term debt coming due until 2010. This should give the company more room to pay for any more acquisitions over the coming quarters.

At current levels, Arrow Electronics shares offer investors growth at a reasonable price. The company's sales are spread across the globe, and management has solid near-term demand visibility.

Arrow's buyback program and discount valuation should limit near-term downside, and I believe the stock could trade up toward the mid-$40s over the coming quarters.