What a brutal six months it’s been for Arrow Electronics. The stock has dropped 27% and now trades at $98.43, rattling many shareholders. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Arrow Electronics, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Even with the cheaper entry price, we're cautious about Arrow Electronics. Here are three reasons why we avoid ARW and a stock we'd rather own.
Why Do We Think Arrow Electronics Will Underperform?
Founded as a single retail store, Arrow Electronics (NYSE: ARW) provides electronic components and enterprise computing solutions to businesses globally.
1. Long-Term Revenue Growth Flatter Than a Pancake
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Arrow Electronics struggled to consistently increase demand as its $27.92 billion of sales for the trailing 12 months was close to its revenue five years ago. This wasn’t a great result and is a sign of poor business quality. 
2. Low Gross Margin Reveals Weak Structural Profitability
All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.
Arrow Electronics has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 12.2% gross margin over the last five years. That means Arrow Electronics paid its suppliers a lot of money ($87.81 for every $100 in revenue) to run its business. 
3. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Arrow Electronics’s EPS grew at an unimpressive 7% compounded annual growth rate over the last five years. On the bright side, this performance was better than its flat revenue and tells us management responded to softer demand by adapting its cost structure.
Final Judgment
We see the value of companies helping their customers, but in the case of Arrow Electronics, we’re out. After the recent drawdown, the stock trades at 8× forward price-to-earnings (or $98.43 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d recommend looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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