Wholesale Electronics at Wholesale Prices?

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The wholesale electronics industry is a bit hidden from the public because it caters more towards professionals. This is a good thing, since it presents some opportunities to get into a good deal on a company that isn't as closely followed as more mainstream businesses. Let's see some potentially great deals and suss out their real values.

Good value in a lesser-known business

Arrow Electronics (NYSE: ARW) has ranked in the top 200 of the Fortune 500 list, and has passed $20 billion in annual sales several times in the past few years. Having operated since the 1930's, Arrow has shown that it has staying power and can adapt to changes in the consumer tech marketplace. While not many people buy used radio parts anymore, the computer division seems to be working well around the world.

Normally, I don't like acquisitions because they provide the illusion of growth without actually expanding the company's market position or adding value to the shareholders. In Arrow's case, however, their acquisitions have brought them solid management, like getting CEO Michael J. Long from acquiring Lex. Arrow has also used acquisitions to solidify its hold over reverse logistics, which is a hugely growing industry because it is an environmentally friendly way for companies to cut their costs and keep their equipment operating longer.

The only issue I have with Arrow is that its 2.3% profit margins are a trifle slim. However, in this instance I'll give that a pass, since the earnings multiple as of this writing is still only slightly higher than 9. Since the company is trading at just slightly over its book value, I'd call Arrow a potentially solid buy. If the profit margins could be strengthened and a dividend could be paid, this would be a slam dunk.

Running with the big dogs

Avnet (NYSE: AVT) is quite possibly the world's biggest franchise-based electronic component and subsystem distributor. Working as a major partner to IBM and providing parts to many manufacturers, Avnet has a strong contractual moat going for it. I also like that the company doesn't have to cater to the fickle consumer market, allowing the marketing expense to be shouldered by the better-known companies Avnet works with.

Avnet also works in 34 countries. This has a great benefit because the company can use currency differences and inexpensive labor to directly control its operating costs. Vertical integration is a great way to keep the company profitable through difficult circumstances. This is even better because Avnet makes use of franchises, keeping many of the daily working costs off of the main company's back. So the 1.8% profit margin Avnet is pulling doesn't overly worry me. This company shifted during the Great Depression and didn't skip a beat during the Great Recession, so it's got staying power.

Trading at around 10 times its earnings and just over its book value, Avnet does seem to be a good deal.

Rockwell Automation (NYSE: ROK) is the kind of company that makes others work better. With its XM Vibration Monitors, it aids industrial safety. With its PanelView Plus monitors, it enables companies to easily keep track of the variables that need to be dealt with. With its line of programmable logic controllers, Rockwell aids in the automation of rote processes. In an increasingly automated world, this seems like a solid moat. Plus, those are only a small handful of the items Rockwell manufactures.

Further, Rockwell has most of the other things I look for in a company. Dodging the consumer market and working with companies directly is a fairly solid play that tends to stabilize itself with contracts. Trading at around 17 times earnings, Rockwell is a slight discount from the S&P 500 price range. Plus, Rockwell pays a 2.4% dividend. Overall, the company is pretty good. Pulling 11.6% profit margins, there's wiggle room if something goes wrong.

On the whole, my only possible issue with Rockwell is that it's trading for 6 times its book value. That could simply be a reflection of the company's bookkeeping practices, so it's only a small irritation. I would recommend Rockwell, even more so than the other two companies in this list.

The Foolish bottom line

These electronics wholesalers actually are good deals. In some cases, trim profit margins have led to particularly attractive valuations. Even when they're trading at a more average price range, they're still pretty decent investments.

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Chris Hodge has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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