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Market Keeps Close Eye on Inventory

Earnings calls can tell you a lot about what's on the industry's radar. The questions analysts ask executives are a good indication of what does, or doesn't, worry the market. This quarter, in addition to the overall economy, analysts are worried about inventory.

Inventory levels appear to be building, and that's usually a sign of slower demand. Analysts spent a lot of time talking about inventory with executives from {complink 453|Arrow Electronics Inc.}, which today announced record second-quarter net income of $156.2 million on sales of $5.54 billion, compared with net income of $116.2 million on sales of $4.61 billion a year earlier. Arrow, like {complink 577|Avnet Inc.}, has hundreds of component suppliers and serves thousands of OEM customers, so it offers a pretty good picture of supply and demand.

Component orders from all regions dropped off in June, so Arrow's inventories began to build. In particular, orders from Europe were soft, because of the economic challenges there, along with concerns about the March earthquake and tsunami in Japan. Michael Long, CEO of Arrow, says this normally would be a concern. But orders began to pick up in early July, so it looks like customers were undergoing an inventory correction in June.

This is not unusual. June is the close of the second calendar quarter. At the OEM and EMS level, when a company reports its earnings, the balance sheet looks better if there is less inventory on the shelves.

“We believe there is a rebalancing going on” at the customer level, “and I think this will be ongoing for the quarter,” Long said during the call. “The benefit of that is we are seeing an uptick in bookings, and we should be able to balance inventory as long as we watch the bookings out the door.”

Arrow reported inventory buildup in all its commodity product categories: semiconductor, interconnect, passive, and electromechanical. These products are easy to resell, since they are used across the distribution customer base.

Distributors generally don't know the reasons when customers adjust their orders, so an industrywide inventory correction is possible. Since Arrow's book-to-bill ratio rebounded in all regions this month, indications are the industry is experiencing a normal seasonal slowdown. “Our inventories will match that market,” Long said. “We are never far away from getting [our] inventory balance where it should be.”

10 comments on “Market Keeps Close Eye on Inventory

  1. Eldredge
    July 27, 2011

    Sounds cautiously optimistic. It can be diffcult to guess at the reasons for order changes – as pointed out in the article, while itr would be beneficial information to have, customers don t provide the reasons for their order adjustments.

  2. mario8a
    July 28, 2011

    “inventory will match the market”

    will this be a dream come true of every one who develop forecast?

    Companies should be conservative about inventory excess and even consider the possbility of having returns for the exact saem reason.

     

  3. Jay_Bond
    July 28, 2011

    I know there are many companies out there, mine included that are looking to reduce their current inventory levels right now due to uncertainty in the global market. There is a lot of talk about a double dip recession and it has everybody being cautious on purchasing so they don't get stuck with money tied up in inventory sitting on shelves. Even companies who have reported great quarterly earnings are being cautious right now. I'm sure there have been some inventory corrections, which are always needed, but the lagging sales and concerns over Europe’s and the U.S. financial situations seems to be dictating current inventory levels.

  4. eemom
    July 28, 2011

    While we are seeing a healthy growth in some of the market sectors, there is enough uncertainty in the global economy that makes everyone conservative in their forecasts.  Inventory control is key to a healthy balance sheet so it would not be surprising to see continued conservatism and tighter controls.

  5. JADEN
    July 28, 2011

    Inventory process begins as soon as production starts from the supply of raw materials to the point of sales to meet meet the customer demand and also to avoid loss of sales, if properly done.

  6. Eldredge
    July 28, 2011

    I tend to agree – today's economy does not encourage a need for inventory growth.

  7. Ms. Daisy
    July 31, 2011

    Absolutely! I suspect that the uncertainty created in the market by the U.S. will further add to the increase in inventories as demand will drop further in response to the uncertain future.

    Hopefully the legislators here can do something or at least assure America's financial health and help the economic recovery globally.

  8. Taimoor Zubar
    July 31, 2011

    I think with surplus inventory, the risk of components getting obsolete is high. Companies have to consider this when they are approaching with high levels of inventory. Considering Arrow's case, do you think this would apply to them? Is there a chance that the surplus components will no longer be useful in near future because of the development of some other advanced versions?

  9. stochastic excursion
    August 1, 2011

    A distributor like Arrow deals with components that can be sold at relatively high volumes and have a broad range of applications.  I'm sure they're keeping an eye on signs the markets are softening for any one component though.  One worry might be if there's a bubble in capacity for certain chips that would be difficult to scale down rapidly.

  10. Eldredge
    August 1, 2011

    That's exactly right – who wants to get stuck with an inventory of obsolete parts that no one else wants?

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