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Avnet's Earnings Beat Makes AVT Stock and Options Look Attractive
Avnet (AVT) reported an earnings beat last week highlighting the stock's underlying value at just 5.7x earnings, 2.89% yield, with huge buybacks. As a result, options income plays are also attracting investors.
On Oct. 26, Avnet, the Phoenix-based electronics components distributor, reported its latest quarterly results with sales up 20.9% YoY. In addition, its adjusted diluted earnings per share (EPS) rose 63.9% to $2.00 from $1.22 just last quarter.
In addition, the company said it bought back 3.6% of its shares during the quarter. It spent $146 million doing this. At this rate, the company could end up buying back over 14% on an annualized basis.
Avnet's Value
In August Avnet raised its quarterly dividend per share by 11.5% to 29 cents, which now gives the stock a forward dividend yield of 2.90%. In addition, analysts now forecast EPS of $6.99 for the year ending June 2023. That puts it on a low multiple of just 5.7x earnings.
This low P/E multiple, along with the dividend yield and buyback action, makes AVT stock attractive from a value standpoint. The company has bought back over 6% of its stock in the last two quarters. During the quarterly conference call, it said it has $383 million in buyback authorization left. That represents over 10% more of its shares that the company could potentially repurchase.
The huge share buybacks allow the company to continue to raise its dividend without any additional cost to the company. It also has the effect of raising the earnings per share calculation, since the denominator in that calculation for EPS (share outstanding) keeps dropping.
On top of this, enterprising investors are now taking interest in options income plays with AVT stock using covered calls and short put plays.
Option Income Plays
Investors who buy at least 100 shares of AVT stock can sell one out-of-the-money (OTM) call contract and book income. For example, the Barchart option income chain below shows that the Nov. 18 calls chain offers calls at the $43 strike price with a premium of 45 cents in midprice.
This means that if an investor spent $4,016 on 100 shares at $40.16 per share, and then sold one contract at the $43.00 strike price they will receive $45.00 immediately in their account. That represents a gain of 1.12% $45/$4,016). In addition, if AVT stock rises to $43 or more by Nov. 18, they get to keep the 7% capital gain from $40.16 to $43 per share. However, if the stock rises higher than $43.45 per share, they lose out on any additional upside.
Moreover, investors can also sell OTM puts and collect options premium income. For example, the $38.00 strike price, which is 5% below today's price, offers a 58 cents premium.
This means that if any investor puts up $3,800 in cash with their broker they can sell one put contract at the $38.00 strike price and receive $58.00 immediately. That represents a return o of 1.53% on the potential investment of $3,800. However, this has to happen within the next 18 days in order for the put contract to be exercised.
On the other hand, if the stock rises, the investor will miss out on any capital gain. That is why some do both the OTM call and put options income plays at the same time. The bottom line is that AVT stock has attractive income option plays and is cheap on a fundamental basis.
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