WESCO International’s (WCC) third quarter 2013 earnings of $1.42 per share beat the Zacks Consensus Estimate of $1.41 by a penny.
Revenues
WESCO reported revenues of $1.93 billion, up 2.1% sequentially and 16.6% 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 an expanding pipeline, higher bidding activity and growing backlog. The Utilities market remains the strongest.
WESCO stated that sales from the Industrial end market improved in the reported quarter versus the first half of the year. Channel inventories were more or less commensurate with market demand and bid activity levels were strong. Management was optimistic about the opportunity pipeline, which continued to expand.
The company is seeing a mixed Construction market. While still weak, the non-residential construction market in the U.S. and Canada is starting to show signs of improvement. Sales to construction customers improved in the quarter, marking the first quarter of growth in construction since the second quarter of 2012. 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) registered improvement in the quarter. Sales growth was driven by broadband communications and improvements in commercial and institutional markets, which were partially offset by continued declines in government due to budget constraints and sequestration.
WESCO remains focused on providing a one-stop shop for its customer supply chain needs. As a result, in the third quarter, the company renewed a long-term contract with a large Canadian mining company.
Margins
Gross margin excluding depreciation and amortization was 20.5%, flattish on a year-over-year basis. WESCO has maintained steady gross margins over the past few years owing to its integrated model and tight cost control.
Operating profit of $123.7 million was up 20.0% from the year-ago quarter. The operating margin of 6.4% expanded 20 bps from the year-ago quarter.
On a non-GAAP basis, WESCO’s net income was $74.7 million, up 17.8% from the year-ago quarter.
Balance Sheet & Cash Flow
Cash balance at the end of the quarter was $98.6 million, down $12.5 million during the quarter. Trade accounts receivable were 1.1 billion, flat sequentially.
Guidance
For the fourth quarter of 2013, WESCO expects year-over-year revenue increase of at least 14-17% (including the contribution from EECOL). The gross margin is expected to be 20.5% or above while the operating margin is expected to be at least 6%. The tax rate is expected to be in the 26-28% range.
For the full year, sales are expected to be up 14-15% on a consolidated basis. The gross margin is expected to be at least 20.7%, with the operating margin in the range of 5.9-6% and the tax rate at around 26-27%. All this is expected to result in earnings per share of $5.00-$5.20 for the year.
Conclusion
WESCO’s business is currently being driven by strengthening 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 #3 (Hold). Investors can also consider some other stocks with a positive Zacks Rank and Earnings ESP:
- InvenSense Inc. (INVN), Earnings ESP of +10.53% and a Zacks Rank #2 (Buy)
- Gartner Inc. (IT), Earnings ESP of +2.56% and a Zacks Rank #3 (Hold)
- Jarden Corp (JAH), Earnings ESP of +2.00% and a Zacks Rank # 1 (Strong Buy)
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