Arrow: A Hidden Value in Electronics

Some really strange stuff happened at this year’s Super Bowl; the NFL actually delivered a good game to fans, both teams put in a respectable performance on the field, the Denver Broncos actually won the Lombardi Trophy, there were no memorable ads and, most shocking of all, a money-making company with a good stock ran an advertisement during the big game.

That company is Arrow Electronics (NYSE: ARW), which manufactures and distributes electronic components. Arrow has been on a roll lately even without its Super Bowl debut. Over the few past years the company has experienced a very impressive growth in revenues.

Arrow’s Growing Revenues

Arrow reported a TTM revenue of $22.77 billion in December 2014 that grew to $23.28 billion just a year later. That revenue growth has been going on for some time; Arrow reported a TTM revenue of $21.36 billion in December 2013. That means Arrow added $1.92 billion, or nearly $2 billion, in revenue in just two years—not bad for a small company based in Centennial, Colorado.

The revenue numbers are not the only impressive figures at Arrow. On December 31, 2015, the company delivered the following earning financial results for the fourth quarter:

• A diluted earnings per share figure of 5.209

 

• A net income of $497.73 million

 

• A profit margin of 2.35%

 

• A free cash flow of $502.39 million

 

• A return on equity of 12.09%

• $273.09 million in cash and short-term investments

 

• $655.08 million in cash from operations

 

• $13.02 billion in assets

 

More importantly, Arrow is something of a bargain; it reported a market capitalization of $4.883 billion and an enterprise value of $6.857 billion on February 12, 2016, meaning it is highly undervalued even though its revenues are increasing.

Arrow’s Growing Cash Flow

Arrow’s cash flow is also increasing its cash from operations number from $568 million in September 2015 to $655.08 million in December. Arrow’s free cash flow also jumped from -$152.73 million in September to $502.39 million in December. This means Arrow’s free cash flow increased by $655.12 million over the fourth quarter of 2015.

Arrow is also making money from that additional revenue. Its net income rose from $455.41 million in the third quarter of 2015 to $497.73 million in the fourth quarter. That means Arrow’s income increased by $42.73 million over one quarter.

The problem is that this cash flow increase might not be generating float, because its income has been very uneven over the past year. Arrow reported $516.7 million in income in September 2014, $498.05 million in December 2014, $496.98 million in March 2015, $493.03 million in June 2015, $455.41 million in September 2015 and $497.73 million at the end of the year.

This makes Arrow something of a risk, but I think the low share price offsets that risk. More importantly, Arrow is on the cutting edge of one of the hottest areas in technology these days: self-driving autonomous cars.

A Leader in Self-Driving Cars

Watchers of the Denver media and readers of this blog know that Arrow has a very impressive self-driving car program.

Last year former Indy Car driver Sam Schmidt turned a lap in a Corvette equipped with Arrow’s self-driving technology. That feat was impressive because Schmidt is a quadriplegic who lost the use of his legs in a race car crash in 2000. Arrow’s engineers added the technology, proving they have the basic technology to provide self-driving car components for all the companies entering the business.

That includes traditional automakers like Ford, Mercedes, GM and Nissan; newcomers like Tesla and Faraday Future; and non-automakers such as Apple, Uber and Alphabet, which are experimenting in the business. This makes Arrow a great way to cash in on the self-driving revolution because it will make and sell the components no matter who builds the cars.

The field is potentially very lucrative because Ford alone has $58.75 billion in the bank to invest in self-driving cars and plans to invest around $4.5 billion in electric car technology. The U.S. Department of Transportation is also planning to invest $4 billion in efforts to make the roads safe for autonomous vehicles.

So if you’re looking for a way to cash in on self-driving cars, Arrow could be it. This company’s stock is cheap, and it is making money right now. It’s also a lot safer than the overhyped and overpriced Tesla Motors (NASDAQ: TSLA) even though it lacks Elon Musk’s star power.