WESCO International’s (WCC) first quarter 2014 earnings of 97 cents per share missed the Zacks Consensus Estimate by 11 cents. Lower sales volumes in Canada and a weaker Canadian currency led to the dismal bottom line performance.
Revenues
WESCO reported revenues of $1.81 billion, down 3..7% sequentially but up 0.2% year over year. The year-over-year increase was attributable to the positive impact of acquisitions, better pricing and organic sales growth, partially offset by harsh weather conditions, which deferred the weather-related projects, and an adverse foreign exchange impact. Revenues, however, missed the Zacks Consensus Estimate of $1.83 billion.
End Market Update
WESCO is seeing signs of strength across end markets, with an expanding pipeline, higher bidding activity and growing backlog. The Utilities market remains the strongest. However, the Construction market experienced declines in sales due to adverse weather conditions.
WESCO stated that sales from the Industrial end market were up in the reported quarter due to strengthening at original equipment manufacturers (OEM) and heavy manufacturing-oriented customers. Also, bid activity levels in the quarter were the highest in the past 5 years. Moreover, since channel inventories remain lean, the recent buildup activity is a positive, indicating future growth.
The company is seeing a mixed Construction market. Sales were negatively impacted in the U.S. and Canada due to a harsh winter, which delayed projects. While still weak, the non-residential construction market in the U.S. and Canada is starting to show improvement; with signs of escalating construction activity in the U.S.
In Canada, the story is also positive, with the grouping of EECOL and WESCO. Moreover, the market is expected to get better after the spring defrost, which marks the beginning of the construction season.
The Utilities business continues to see good growth, attributable to WESCO’s integrated supply model. The model is particularly helpful for utilities looking for efficiency and effectiveness in their supply chains. WESCO has steadily improved its offerings on the transmission side, which have seen it through the recession. However, the current strength is also attributable to new wins and an improving distribution business with existing utility customers. Construction markets typically provide the impetus for greater spending by utilities, so stronger construction markets will further add to this strength.
Sales in the CIG market (commercial, institutional and government customers like schools, hospitals, property management firms, retailers, financial institutions, cable companies and governmental agencies) also grew. Commercial and institutional business was particularly strong, but government also improved.
Margins
Gross profit was $374.8 million, or 20.7% of sales, compared with $381.1 million, or 21.1% of sales, in the year-ago quarter. The gross margin declined primarily due to the lower-than-anticipated sales in Canada, which generate higher margins.
Operating profit of $93.0 million was down 32.1% from the year-ago quarter. Operating margin of 5.1% contacted 243 basis points (bps) from the year-ago quarter.
WESCO’s net income was $51.9 million, down 38.3% from the year-ago quarter.
Balance Sheet
Cash balance at the end of the quarter was $96.4 million compared with $123.7 million in the prior quarter. Long-term debt in the first quarter was $1.46 billion compared with $1.45 billion in the previous quarter.
Guidance
For the second quarter of 2014, WESCO expects year-over-year revenue increase of at least 5-8%. Gross margin is expected to be in the range of 20.6-20.8% while operating margin is expected to be in the range of 5.7-6.1%. The tax rate is expected to be roughly 28%.
For full year 2014, sales are expected to be up 3-6% on a consolidated basis. Gross margin is expected to be approximately 20.9%, while operating margin is expected in the range of 6.1-6.3%. All this is expected to result in earnings per share of $5.30-$5.70 for the year. Free cash flow is expected to be approximately 80% of net income.
Conclusion
WESCO’s business is currently being driven by strengthening end markets and its integrated supply model, which increase efficiencies for its customers. For the longer term, we continue to believe in WESCO’s solid strategies, strong operating model, market position and customer clout.
However, near-term results will continue to be impacted by economic activity, given the company’s exposure to core markets, such as industrial, utility, construction and government that should contain share price appreciation. Moreover, the existing currency rate situation and foreign exchange is anticipated to negatively impact year-over-year sales.
Currently, WESCO has a Zacks Rank #3 (Hold). Some better-ranked stocks in the technology sector include Conversant, Inc. (CNVR), Interxion Holding NV (INXN), both with a Zacks Rank #1 (Strong Buy) and Facebook Inc. (FB) with a Zacks Rank #2 (Buy).
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