Electronics distributors from Ingram Micro to Avnet could report disappointing quarterly results as pricing pressure intensified, but analysts were cautiously hopeful that profits would rebound by year's end as corporate spending returns.
Avnet, Arrow Electronics Inc and Ingram Micro -- which help the likes of IBM and Hewlett-Packard sell products worldwide -- have struggled with economic uncertainty in Europe, price pressures in North America and a mixed picture in Asia.
But analysts say the trio, which distributes everything from personal computers to microchips, should benefit as corporate budgets loosen and consumer demand firms up along with an expected stabilization of the economy. Arrow and Avnet specialize in components and Ingram in computer hardware and softwar.ce.
Europe and its uncertain economic outlook, however, might prove to be pivotal, some analysts say. Sheerin cautioned that Ingram Micro, for instance, has heavy exposure to the region.
As we look out into the second half, there continues to be optimism about a year-end budget flush, said Thomas Wiesel Partners analyst Matthew Sheerin.
But there are signs that demand and sales trends continue to deteriorate.
Intel kicked off the tech earnings season this month with stellar results, fueling optimism that the tech sector was finally on the road to recovery.
Analysts say IT distributors' shares -- which often lag the overall sector but have rallied generally in line with the market -- may see further upward momentum.
From its 2009 nadir on March 9, the PHLX Semiconductor Index has gained 57 percent as of Friday's close. By comparison, Avnet has climbed 60.2 percent and Arrow 64.5 percent. Global sector leader Ingram Micro however has rallied 87 percent.
For now, analysts are advising neutral or buy on all of the stocks.
The electronics distribution industry is one step behind the semiconductor industry, which in turn is another step behind the industrial economy.
They're lagging the upturn but I expect it to rebound in the December quarter and into the March quarter of 2010, said Brendan Furlong, an analyst with Miller Tabak.
WARY OF EUROPE
Arrow reports results on July 29, Ingram Micro on July 30 and Avnet Aug 5. But the June quarter is likely to disappoint.
Credit Suisse analyst William Stein said Arrow and Avnet were more likely to miss than beat consensus estimates. Others expressed similar concerns for Ingram Micro.
Excluding certain exceptions, Arrow is expected to report earnings of 29 cents a share, Avnet 35 cents a share, and Ingram Micro 20 cents a share for the June quarter, according to Reuters Estimates.
Stein cited Sun Microsystems' pre-announcement in mid-June that it would miss quarterly results expectations and IBM's relatively weak hardware results as two crucial indicators of weak earnings for distributors.
That's negative for both companies in June, he said of Arrow and Avnet. While the margin pressure from the semiconductor suppliers is likely to continue, the hardware distribution business is more likely to improve sometime during the September quarter.
Europe and its uncertain economic outlook also posed a risk to the bottom line for Ingram Micro. To avoid that risk, Sheerin recommended buying smaller rival Synnex, which is relatively less exposed to the region.
Tech Data also employed better cost structure in Europe, several analysts said.
If they (Ingram) have a lot of exposure to Europe it's not going to help improve the operating margins, Sheerin said.
(Editing by Edwin Chan and Maureen Bavdek)