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We’re maintaining our fair value estimate and moat rating for Avnet AVT after it reported third-quarter results that indicate trepidation from enterprise businesses in Western markets, but continued growth in emerging markets. Avnet generated $6.3 billion of total sales, in line with seasonality and our own expectations. Pro-forma sales to higher-margin Western markets (EMEA and Americas) declined year-overyear in both of Avnet’s segments—electronics marketing (EM) and technology solutions (TS)–for the fifth consecutive quarter, while sales to Asia grew 8.4% in EM and 3.1% in TS. The seasonal shift in product mix kept Avnet’s gross margins flat relative to the year-ago quarter, but operating margins declined 80 basis points on higher marketing and operating expenses.

There are a number of reasons businesses outside of Asia seem reluctant to spend on their IT infrastructure and processes. We believe most of the spending declines are from businesses pushing out projects due to the volatile economy, but some of the decline could be a result of reduced need for distributors. For example, Ingram Micro IM — an IT distributor that focuses on components and consumer products–reported organic growth across all regions during the March quarter, with strong demand for mobile devices. Meanwhile, Avnet’s TS sales, which includes supplying businesses with servers, software and computer hardware, among others products and services, are declining. Given the growing prevalence of “bring-yourown- device,” which allows businesses to shift the device costs to their employees, Ingram Micro’s growth could be coming at Avnet’s expense.
Avnet expects fourth-quarter TS sales of $2.45 billion – $2.75 billion, and EM sales of $3.7 billion – $4.0 billion. We believe Avnet possesses global scale advantages over its competitors (save Arrow ARW ), but distribution is a cyclical industry with low barriers to entry. We’d like to see a larger margin of safety before suggesting an investment in Avnet.

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