Broken Arrow, Revisited (ARW)
Cash conversion and earnings-quality risk still dominate our view
Arrow Electronics (ARW) is a global distributor and solutions provider operating in two reportable segments: Global Components (semiconductors, computing/memory, design-in and integration services for OEMs/EMS) and Global ECS (value-added enterprise IT, datacenter, cloud, security, and analytics.) Its customer base includes OEMs, EMS providers, VARs, and MSPs across the industrial, automotive/transportation, telecom, and consumer electronics sectors. In 2024, ~72% of sales came from Global Components and ~28% from Global ECS.
We first covered ARW for our Substack audience back in June of 2024 where we noted that accounting factors accounted for more than half the earnings beats in Q1’24. The following November, the stock dropped 15% after the company issued disappointing guidance with its third-quarter results. We recommend that readers see our report Broken Arrow from November.
After bottoming in April of this year, the stock ran almost 50% before Q2’25 results on hopes the worst was behind it. ARW posted growth in Q2’25 for the first time in years and exceeded revenue and EPS estimates. Order growth also showed positive signs. Despite this, the market drove the stock down roughly 10% due to concerns over margin pressure and cash flow. We don’t put much stock in its EPS beats because ARW used to report earnings of $5.50-$5.80 per quarter and now reports earnings under $2.50, yet it is still reporting larger beats. Our perception is that the company is low-balling forecasts based on assumptions that are significantly off. We believe liquidity could be an issue here, as ARW is carrying much more in payables, and paying those down would consume a considerable amount of future cash flow. We also see several places where results appear to be getting unsustainable accounting-related benefits.
Let’s get behind ARW’s Q2 numbers…