Expenditures worldwide on data-center systems -- comprising servers, storage and network equipment -- will increase about 2.4 percent this year to $127.3 billion, based on projections from Gartner Inc., an industry researcher. That follows gains of almost 2.6 percent last year.
This estimate has remained stable, and halfway through the year it’s “on pace with every other indicator we track,” said John Lovelock, a research vice president in Toronto at Gartner.
Arrow’s global enterprise-computing solutions business and Avnet’s technology-solutions unit provide good barometers of information-technology hardware spending, according to Shawn Harrison, an analyst in Independence, Ohio, at Longbow Research LLC. Real-time indicators such as cancellation rates -- along with guidance from the companies’ executives -- are useful to investors who track incremental changes in demand, he said.
These companies are bellwethers also because they’re not in the personal-computer business, so they aren’t exposed to the weakening demand for these products that has hurt Microsoft Corp. (MSFT:US) and Intel Corp. (INTC:US), he added.
Arrow is scheduled to report second-quarter results tomorrow. Avnet plans to release its fiscal fourth-quarter report on Aug. 7.
After demand for the products they sell slowed in mid-summer and early fall last year, there are signs that some metrics, such as the bookings rate, are “slowly improving,” Harrison said. “IT budgets appear to be holding firm.”
The Federal Reserve Bank of Dallas noted progress in the July 17 Beige Book business survey, saying “high-tech orders and production were flat to slightly up” since the June 5 report. The San Francisco Fed’s Tech Pulse Index also reflects the shift, rising for a fourth consecutive month to 98.67 in June, the highest since 2008. This index tracks the health of the U.S. IT industry using investment, consumption, employment, industrial-production and shipment data.
The pace of tech-hardware spending is picking up as “purchasing managers are starting to press on the gas a little,” said Christian Bertelsen, who oversees more than $1.5 billion in assets as chief investment officer of Global Financial Private Capital in Sarasota, Florida. Companies are investing in part to replace old equipment after purchases were delayed last year, he said.
Arrow’s global enterprise-computing solutions revenue grew 8 percent from a year ago to $1.66 billion in the three months ended March 30, the Englewood, Colorado-based company said May 1. It forecasts second-quarter sales will be between $1.75 billion and $1.95 billion, compared with almost $1.7 billion a year ago.
Worldwide sales in Phoenix-based Avnet’s technology-solutions business fell 0.9 percent from a year earlier to about $2.5 billion in the three months ended March 30, it reported April 25.
Bertelsen said Arrow and Avnet will provide an “excellent tell” for investors on capital-spending trends -- particularly among small- to mid-sized businesses -- when they report in the next two weeks. That’s because these companies could provide “real confirmation” that demand is improving after “some of the dog-eat-dog days” of late 2012, he said.
Bertelsen also will consider the guidance these distributors provide to determine if sales are poised to rebound further, supporting his bullish outlook on the tech industry for the year, he said.
In the U.S., economic growth is forecast to accelerate to 2.3 percent in the third quarter and 2.6 percent in the fourth, based on the median estimate of economists surveyed by Bloomberg. That follows a gain of 1.8 percent in the three months ended March 31, and a projected increase of 1.5 percent for the second quarter.
In addition to their usefulness as macroeconomic barometers, these companies also pass Bertelsen’s tests for interesting investment opportunities. The stocks are cheap on a historical basis and are “priced for low expectations” that may not accurately reflect an improvement in tech spending for the year, he said. “They’re cheap and under-owned.”
Avnet and Arrow stocks now are trading at “close to parity” on a price-to-book ratio: about 1.2 times the value of assets, compared with a historical peak multiple of 1.5, Harrison said. Valuations close to book value provide a “good entry point” for some investors, he said, adding that he maintains buy recommendations on both.
Shares of Arrow have outpaced the Standard & Poor’s 500 Index by almost 11 percentage points since May 1, while Avnet’s stock has led the same benchmark index by about 8 percentage points. That follows 15 months when these stocks lagged behind the market by 34 percentage points and 30 percentage points.
Their recent performance shows that investor sentiment started to improve in May after a prolonged selloff, said Jim Stellakis, founder and director of research at Greenwich, Connecticut-based research company Technical Alpha Inc. and a chartered market technician. Shares of Avnet and Arrow are “having a good move,” though they need to trade above relative highs from earlier this year to show that “investors are more comfortable overweighting these stocks.”
Some investors aren’t as bullish. Even though data from Avnet and Arrow are useful as “global indicators of what’s going on,” Marty Leclerc of Barrack Yard Advisors would avoid their stocks. These companies “lack a history of enhancing shareholder value and so don’t have much in the way of investment merit,” said Leclerc, chief investment officer overseeing $350 million in assets in Bryn Mawr, Pennsylvania.
Cisco Systems Inc. (CSCO:US) or International Business Machines Corp. (IBM:US) are “a much better place for investors to look to participate in any rebound in global IT capital spending,” Leclerc said.
The International Monetary Fund cut its forecast for worldwide growth for a fifth consecutive time earlier this month, to 3.1 percent in 2013, unchanged from the 2012 rate.
Arrow and Avnet also must address how they’ll adapt as demand shifts further in favor of cloud-based computing, Harrison said. That’s because these companies don’t currently have a “fully formed presence to address this growing industry in their distribution businesses,” he said. “Everyone knows that there’s a headwind coming.”
In the near term, they could benefit from pent-up demand as small- and mid-sized company executives become more comfortable with investing in technology again. In addition, a traditional “budget flush” could buoy demand for servers, storage and network gear as companies spend remaining funds at year end, Lovelock said.
Orders for nondefense capital goods excluding aircraft, a proxy for future business investment in computers, electronics and other equipment, rose 3.4 percent in May from a year ago, following a 4.5 percent gain the prior month, according to data from the Census Bureau.
Such improvements underscore Bertelsen’s bullish outlook on the technology industry and help explain why he’s considering investing in Arrow and Avnet stocks again, he said.
“I think we’re going to see better things ahead in this industry.”
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