WESCO International’s (WCC) second quarter earnings of $1.25 per share were below the Zacks Consensus Estimate of $1.35.
Revenues
WESCO reported revenues of $1.89 billion, up 4.4% sequentially and 13.2% year over year. The year-over-year increase was attributable to the positive impact of acquisitions, partially offset by a reduction in organic sales and unfavorable currency movements.
End Market Update
WESCO is seeing signs of strength across end markets, with a swelling pipeline, higher bidding activity and growing backlog. The Utilities market remains the strongest.
WESCO stated that sales from the Industrial end market suffered due to delays in customer spending. Also, year-over-year comps were hard because of several ongoing industrial capital projects last year that did not continue into the reported quarter. However, channel inventories were balanced with market demand and bid activity levels remained strong. Management was optimistic about the opportunity pipeline, which continued to expand.
WESCO is seeing a mixed Construction market. Though the U.S. non-residential construction market remains challenged, WESCO is seeing improvement in Canada and most other international markets. The U.S. market witnessed difficult comps owing to conducive weather in the year-ago quarter. The residential construction story remains positive, although WESCO’s limited exposure to the segment means that there will be no material impact on its results.
The Utilities business continues to see good growth, which management attributed 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. 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 (schools, hospitals, property management firms, retailers, financial institutions, cable companies and governmental agencies) remained weak for the quarter. The government side of the business is weaker due to budget constraints and deferral of project awards.
Margins
The gross margin was 20.7%, up 60 basis points (bps) year over year. WESCO has maintained steady gross margins over the past year or so owing to its integrated model and tight cost control.
Operating expenses of $282.7 million were up 18.0% from the year-ago quarter. However, operating margin of 5.8% expanded 10 bps from the year-ago quarter.
Net Income
On a pro forma basis, WESCO’s net income was $65.3 million compared to a net income of $58.9 million in the year-ago quarter. Since there were no one-time items, the pro forma EPS was same as the GAAP EPS of$1.25 compared to $1.15in the same quarter last year.
Balance Sheet & Cash Flow
The cash balance at the end of the quarter was $104.5 million, down $12.3 million during the quarter. Trade accounts receivable were 1.1 billion, flat sequentially. Long term debt in the second quarter was 1.57 billion versus 1.63 billion in the prior quarter.
WESCO generated $39.4 million in cash from operations and spent $5.8 million on capex, resulting in free cash flow of $33.6 million during the quarter.
Guidance
For the third quarter of 2013, WESCO expects year-over-year revenue increase of at least 17-19% (including the contribution from EECOL).The gross margin is expected to be at or above 20.8% while the operating margin is expected to be at least 6.2%. The tax rate is expected to be in the 26-27% range.
For full year, sales are expected to be up 14-16% on a consolidated basis. Gross margin is expected to be at least 20.9%, with operating margin at or above 6.6% and tax rate around 26-27%. All this is expected to result in earnings per share of $5.15-$5.35 for the year (well below the Zacks Consensus Estimate of $5.55).
Conclusion
WESCO’s business is currently being driven by strong end markets and its integrated supply model, which is increasing 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 segments, such as industrial, utility, construction and government that should contain share price appreciation.
Currently, WESCO shares have a Zacks Rank #4 (Sell). Investors can also consider some other stocks with a positive Zacks Rank and an expected surprise prediction or ESP Read: Zacks Earnings ESP: A Better Method).
InvenSense Inc. (INVN), Earnings ESP of +8.33% and a Zacks Rank #2 (Buy)
Gartner Inc. (IT), Earnings ESP of +1.96% and a Zacks Rank #2 (Buy)
Scientific Games Corporation (SGMS), with an ESP of +100.0% and a Zacks Rank #3 (Hold)
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