Scenario 1: A Self-Help Story

In the mid-cap portfolio, we have four general investment categories that spread across the value and deep value buckets.


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Transcript 

Avnet, ticker AVT, is what we consider great self-help example.

We are encouraged by the operational and strategic direction of Avnet under a CEO and other key leaders that have been in place for 12-18 months.

Avnet is cycling past three large customer contract losses that resulted from semiconductor industry consolidation. Avnet could just as easily be on the right side of semiconductor mergers in the future, so there was an element of bad luck involved.

Avnet is responding by reducing 4-6% of its expense base.

However, more importantly Avnet is also getting past an ill-guided and messy IT systems conversion. This hindered the company's ability to compete effectively and required Avnet to carry duplicate inventory.

We are encouraged by Avnet's increased presence with early-stage semi designers and engineers, as it provides the company with projects that have a longer life cycle, more predictable revenue streams, and higher margins.

Avnet also has the opportunity to significantly improve its cash flow profile.

Avnet's cash conversion cycle—simply put that's the number of days it takes to convert things like accounts receivables and inventory to cash—is in the 90s. This compares to its closest competitor, Arrow, in the 50s.

Even when adjusting for differences in product mix between the two players, we think Avnet’s cash conversion cycle should be in the mid-70s or better. Simply put, this translates into $700 million to $1 billion of potential cash flow improvement opportunity. That represents a significant chunk of Avnet's current market cap and enterprise value.

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Presenter

Heartland Advisors Value Investing Portfolio Manager Colin McWey

Colin McWey

McWey, CFA, is Vice President and Portfolio Manager of the Select Value and Mid Cap Value Funds and their corresponding separately managed account strategies. He has 16 years of industry experience, 9 at Heartland.

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