Despite the weaker summer selling season, most electronics distributors should generate sequential sales and earnings growth in the third quarter compared with the previous quarter. In years past, third-quarter results were usually slightly down compared with the second quarter due to the normal summer slowdown.
This year, however, the cyclical upturn in the semiconductor industry has more than offset the usual summer slowdown. After more than three years of oversupply in the marketplace, which caused significant price and margin erosion, the trend has reversed and product is now on allocation. Order lead times have stretched out, and pricing and margins have improved.
By geography, the domestic market continues to drive industry growth. The strength of the U.S. telecommunications, networking, and industrial-automation end markets are driving the demand for components. Combining this stronger demand with stable pricing has resulted in stronger revenue growth and operating leverage.
In Asia, sales growth is also increasing demand as these economies emerge from recession. Although the European market remains weak, it does not appear to be getting any worse. The summer slow-down is always most evident in Europe, which makes it difficult to judge current market conditions.
By product category, accelerating sales growth in electronic components has been partially offset by decelerating sales growth in computer systems. Part of this phenomenon may be due to concerns associated with Y2K. For example, OEMs may be double-ordering electronic components to build a safety stock of inventory going into 2000.
On the other hand, corporations may be postponing new orders for computer systems because they may not want to disrupt their Y2K-compliant systems. These trends could continue into the fourth quarter and then reverse in the first quarter of 2000, when OEMs will need to bleed off excess component inventory and corporations reaccelerate buying of computer systems.
For the four largest publicly held distributors, there may be a slight divergence in third-quarter results. Arrow Electronics Inc., Kent Electronics Corp., and Pioneer-Standard Electronics Inc. should generate sequential sales and earnings improvement driven by strong North American component sales. Arrow's results will be further enhanced by synergies created by integrating the acquisitions of Richey and Bell, but offset somewhat by weakness in the European components business and sluggish computer-system sales.
As for Pioneer, despite slower industry-wide computer system sales, it is benefiting from a rebound in the Compaq/DEC product line. Additionally, it has no direct exposure to the sluggish European market. Furthermore, Kent is benefiting from economies of scale at its K*Tec division. Now that it has reached critical mass, margins are improving.
Avnet may show a sequential decline in sales and earnings because of the divestiture of Allied Electronics. Additionally, its European sales continue to be weak. However, looking into calendar year 2000, Avnet should benefit from synergies created by integrating the acquisitions of Marshall, SEI, and SEI Macro.