Narrow-moat Avnet has differentiated itself in the tech hardware and services distribution industry and is currently trading at a discount to our fair value estimate.
Simran Kaur: My top pick in the technology hardware and services space is Avnet (AVT), which is currently trading at a discount to our fair value estimate of $50 per share and falls in the 4-star category [based on the Morningstar Rating for stocks]. We believe this global value-added distributor has differentiated itself from the traditional distribution industry and created a narrow economic moat.
As a percent of total firm revenues, Avnet's value-added business is much bigger than those of broadline distributors and, thus, it materially expands its consolidated operating margin profile. However, what really sets the distributor apart is its design-win business. Avnet's highly skilled engineering workforce partners with customers in the field and creates multi-vendor solutions for their innovative needs.
If the end product is successful, this solution leads to a multiyear commitment, which is called design wins. Design wins are the cream of the business with operating margins of 5% to 6% greater than the low single-digit margin profile of value-added business and pure fulfillment. We believe the mix of these three offerings will help Avnet generate better-than-average top-line growth and profitability and returns above its cost of capital for the next few years.
