Avnet's Record Q4 FY26 Results Suggest Operating Leverage, But Inventory and Valuation Concerns Linger

What happened

Our prior WAIT rating on Avnet was based on uncertainty around inventory normalization and margin expansion amid an Asia-heavy mix. The company's fiscal Q4 2026 results, reported in late October, showed a dramatic acceleration with sales up 48% YoY to $8.3B and adjusted EPS up 182% to $2.28, indicating significant operating leverage. Management attributed the improvement to margin gains in both Electronic Components and Farnell, suggesting a broadening recovery beyond just revenue growth. However, the figures do not explicitly confirm whether inventory days have dropped below the 80-day target we set, and the sales surge of 48% may be flattered by easy comparisons or restocking rather than organic demand. Additionally, with the stock likely having re-rated upward after this report, the valuation multiple may no longer offer the margin of safety we previously sought at $58.

Implication

The Q4 FY26 results demonstrate that Avnet can convert revenue growth into earnings, but the sustainability of this operating leverage depends on whether the margin improvement is structural or driven by temporary mix shifts. While both segments showed margin gains, the geographic mix remains a risk if Asia continues to dominate sales, as it has historically been lower margin. Our previous concern about the April 2026 note repayment appears resolved, removing a near-term liquidity overhang, but net leverage remains elevated at over 4x EBITDA, leaving limited room for error in a downturn. The stock's valuation after the earnings pop likely exceeds our previous trim threshold of $75, suggesting that much of the good news is already reflected in the price. A more prudent approach is to wait for either a pullback toward the $58 attractive entry or confirmation in the next quarter that inventory days have fallen below 80 and operating margin has stabilized above 2.6%.

Thesis delta

The thesis has shifted from a defensive WAIT to a conditional HOLD, as the strong Q4 FY26 results partially address our margin concerns and the debt repayment risk has passed. However, the lack of explicit inventory data and the likelihood of an inflated valuation prevent a full upgrade to BUY. We would become more constructive if the next quarter confirms inventory normalization and margin durability, or if the stock pulls back to a more attractive entry.