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Avnet (AVT) has crossed both of our Value and Yield Leader Rankings in recent weeks, showcasing its attractive 14x forward earnings valuation and decent 2.8% dividend yield. Avnet is a global electronic component distributor, working with manufacturers in all major electronic component segments. Essentially, if they use a chip, Avnet can supply that business, serving organizations of all sizes, from startups to enterprises and electronic manufacturing services (EMS) providers. Like EMS providers, AVT's margins are slim; in Q2 (Dec), the company posted adjusted operating margins of just 2.8%, down 100 bps yr/yr. However, AVT operates on volume, supporting its steady ~$5.6 bln in revenue over the past four quarters.

There are headwinds present in the semiconductor space as tariff-related uncertainty spurs concerns over how organizations will offset potentially higher costs and lower customer spending. Earlier this month, AVT touched on the subject, noting that during the first round of tariffs in 2017, it handled the higher costs, successfully passing them along to the customer with no impact from a P&L perspective. While this time around the picture has changed, AVT's confidence in managing the matter has not. The company stated that its relationship with suppliers will help mitigate impacts, allowing it to source some products from certain countries without tariffs. Ultimately, AVT believes that its systems in place will lead to virtually no impact on its bottom line.

• Over the past several quarters, AVT has been dealing with a clear downturn. Inventories have piled up as demand softens across most sectors outside of AI. The EMEA region, AVT's most lucrative market from a margin standpoint, has seen outsized weakness compared to the Americas and Asia. However, aerospace and defense end markets displayed moderate sequential growth in Q2. Given the EU's current defense push, these markets may see accelerated growth over the coming months, potentially supporting stabilization in the region and propping up AVT's margins.
• Similarly, aerospace and defense end markets enjoyed sequential growth in the Americas in Q2. Revenue still fell by double-digits yr/yr in the region, largely due to customer hesitation regarding upcoming tariffs. However, only around 8% of AVT's business in the Americas is coming out of China. Also, AVT's customers may need a little time to move their supply chains and gear up for tariff impacts.
• Asia was a highlight in Q2, being the only region to post yr/yr sales growth. However, Asia commands the lowest margins, which weighed on AVT's consolidated margins in the quarter. Still, Q2 marked the second straight quarter of yr/yr growth in Asia, an encouraging sign that the region's economies are holding up relatively well. AVT noted that this tends to be a bullish sign for what is to come in the balance of all its other regions.

Tariffs remain a near-term concern as they cloud businesses' plans. This is leading to an issue surrounding the timing related to demand stabilization in EMEA and the Americas. However, given that Asia has started to show signs of growth, a recovery in the West could occur sooner rather than later. Also, despite tariff concerns, shares of AVT have held up relatively well, slipping by just 11% from January highs. As such, we like AVT at current levels for buy-and-hold investors. As always, a 15-20% stop loss limit should be used.