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The early days of Arrow Electronics (NYSE: ARW), dating back to 1935, saw the company selling used radios and radio parts to customers on Cortlandt Street in lower Manhattan.
My, how things have changed.
Now, with over $34 billion in annual revenue, the company is the largest single distributor of electronic components in the United States.
The company is entrenched in its industry and serves a vital role in the supply chain for global technology.
Consensus analyst estimates for Arrow’s full-year 2022 earnings currently come in at $22.09 per share. With a recession looming, analysts are estimating a decrease in earnings to $17.20 per share for next year.
But a decrease in earnings isn’t what we are looking for as investors. Over the long term, we need growth to drive share price returns.
Still, a one-year slight in earnings doesn’t bother me, and we need to frame those earnings against the price that we are currently able to pay for this business.
With Arrow shares recently bumping around $100, we can see that on a price-to-earnings basis, Arrow is trading at 4.5 times 2022’s earnings and 5.8 times 2023’s earnings.
Clearly, those are some minuscule price-to-earnings multiples.
Even more important than earnings, though, is the fact that this company generates a lot of free cash flow. (Free cash flow is defined as excess cash that the business throws off after all capital spending investments have been made.)
I know I’m like a broken record when it comes to free cash flow, but it truly is the most important factor to consider for investors.
Over the past three years, Arrow’s cash flow statements show that the business has generated a cumulative $2.3 billion in free cash flow.
That’s a pretty good chunk of change next to Arrow’s current $6.5 billion stock market capitalization.
Plus, it’s no mystery as to where that free cash flow goes each year. This business buys back a ton of stock.
The chart below shows how Arrow’s management has cut the company’s share count in half over the past decade or so.
I often don’t like share buybacks because publicly traded companies seem to not pay any attention to valuation when they do them. By repurchasing shares at high valuations, companies destroy shareholder value instead of creating it.
But with Arrow’s mid-single-digit price-to-earnings ratios, it’s hard to say that its leadership is overpaying with its share repurchases.
And those share buybacks have helped Arrow’s earnings per share to quintuple from $4.01 in 2010 to over $20 this year. (Share buybacks grow earnings per share because the earnings pie is split between fewer people each and every year.)
Again, paying attention to valuation is key to effectively utilizing those buybacks.
I would summarize Arrow as being a pretty good business trading at a very, very reasonable multiple.
I don’t know that this stock is going to knock anyone’s socks off in the next 12 months, but investors buying today likely will be pretty happy three to five years in the future.
The valuation is low, the free cash flow is strong and the long-term prospects of the business are just fine.
The Value Meter rates Arrow Electronics as “Slightly Undervalued.”
If you have a stock whose valuation you’d like me to grade, leave the ticker in the comments section.
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