Benign Growth For Avnet, Inc. (NASDAQ:AVT) Underpins Its Share Price

Simply Wall St · 07/01 10:20

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 17x, you may consider Avnet, Inc. (NASDAQ:AVT) as a highly attractive investment with its 8.1x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Avnet as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

View our latest analysis for Avnet

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NasdaqGS:AVT Price to Earnings Ratio vs Industry July 1st 2024
Want the full picture on analyst estimates for the company? Then our free report on Avnet will help you uncover what's on the horizon.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Avnet would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 32%. Still, the latest three year period has seen an excellent 292% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 26% during the coming year according to the seven analysts following the company. Meanwhile, the broader market is forecast to expand by 12%, which paints a poor picture.

In light of this, it's understandable that Avnet's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Avnet's P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Avnet's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about these 3 warning signs we've spotted with Avnet (including 1 which is potentially serious).

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.