In the last 30 days, four analysts have boosted their EPS forecasts for this industrial company. But the shares are still trading at bargain levels.
WESCO International (WCC)
From Capitalist Times
WESCO International (WCC) went public in 1999, when the private-equity outfit that purchased Westinghouse’s electrical distribution business in 1994 sought to monetize its investment. Over the subsequent decades, WESCO International has built impressive scale, expanded its product lineup and customer base, and diversified its revenue away from its core construction end-markets (now about 34% of annual revenue) via bolt-on acquisitions funded primarily with free cash flow.
Today, the company acts as a middleman to more than 25,000 suppliers and 75,000 customers that come from the industrial, construction, utility, commercial and institutional markets. Suppliers value the company’s massive customer base, e-commerce platform and capable sales force. Working with WESCO International effectively shifts some of the burden for sales, marketing, delivery and service to a capable partner that continues to grow its customer base and cross-selling opportunities with each acquisition. In the highly fragmented North American electrical distribution market, this scale gives WESCO International a huge advantage over local and regional competitors in terms of its ability to procure favorable pricing and win national accounts.
As customers continue to consolidate the number of suppliers they deal with to simplify their operations, WESCO International should take market share. These market dynamics also offer ample opportunity for the distributor to grow via bolt-on acquisitions. Besides the appeal of working with a single supplier, WESCO International’s scale enables the company to offer competitive prices and access to an inventory of more than 1 million different items.
The company value proposition also includes supply-chain solutions and technical expertise, including safety assessments, engineering services, product prefabrication, inventory management and training.
At WESCO International’s recent investor day, management estimated that 65% to 75% of the company’s revenue comes from business tied to services and technical solutions. This service component helps to insulate its business from competition from the likes of Amazon Business and other online-only players.
Although WESCO International’s base business generates about $200 million in free cash flow annually that the company plows into acquisitions, weakness in industrial end-markets and soft pricing have resulted in two consecutive years of declining sales—one of the reasons that the stock trades at a favorable valuation.
During these fallow years, management has focused on improving operating efficiency by consolidating branches into larger distribution centers and leveraging its spending across fewer suppliers to improve rebates. The company expects its One WESCO initiatives to deliver at least 20 basis points of margin improvement annually. These efforts should ensure that the bottom line looks even better when business picks up.
Moreover, we continue to see strong upside for WESCO International in coming years from robust capital expenditures in the utility sector, where the transition from coal to natural gas and renewable energy has accelerated. This shift likewise requires investment in grid enhancements and other upgrades that improve efficiency.
Management has also highlighted data centers and the ongoing transition to LED lighting as potential upside drivers. The residential construction market has also picked up, while an infrastructure-focused stimulus could be a major upside driver, given WESCO International’s leverage to major projects.
With the stock trading at an undemanding valuation, just the expectation of infrastructure-related fiscal stimulus could catalyze a meaningful rally in the shares. Even without a big infrastructure build-out, WESCO International’s end-markets should strengthen, while the network effect associated with bolt-on acquisitions should drive steady growth. WESCO International rates a buy up to $60 for patient investors who have an eye for value.
Peter Staas, Capitalist Times, www.capitalisttimes.com, 888-960-2759, July 19, 2017