WESCO International’s (WCC) fourth quarter 2014 adjusted earnings of $1.40 cents per share missed the Zacks Consensus Estimate by a good 9 cents. Earnings decreased 7.9% sequentially but increased 28.2% on a year over year basis. The sequential decrease was due to lower gross profit. However, acquisitions as offset by the negative currency impact and fewer work days contributed to the year-over-year increase.
Revenues
WESCO reported revenues of $1.99 billion, down 4% sequentially but up 6.1% year over year. The increase in revenues was attributable to the positive impact of acquisitions, solid sales execution and organic sales growth, partially offset by an adverse foreign exchange impact and fewer work days. Revenues also missed the Zacks Consensus Estimate by a narrow margin.
Organic sales growth was 8.1%, a 1.1% improvement sequentially. This growth has been the highest since the second quarter of 2012. Organic sales growth was attributable to improving markets and the increasing success of the One WESCO strategy.
Growth was broad based across all geographies, end markets and product portfolios. The One WESCO initiative helped the company drive sales execution and post above-market sales results. The strategy, which seeks to meet its clients’ global MRO, OEM, and Capital Project needs, received positive customer response.
End Market Update
WESCO is seeing signs of strength across end markets, with an expanding pipeline, and higher bidding activity generating increasing contract wins. The Utilities market remains the strongest.
The backlog at quarter end was down approximately 6% compared to the year-ago quarter. While U.S. backlog remained flat, backlog in Canada declined 11% on a local currency basis. The book-to-bill ratio remains strong at over 1 in both the U.S. and Canada.
WESCO stated that sales from the Industrial end market were up in the reported quarter due to balanced growth across the industrial customer base. Sales were up 6% year over year.
The company is seeing signs of growth in the Construction market, where year over year sales were up 5% driven by 13% growth in the U.S. and 4% growth in Canada on a local currency basis. This represents the third successive quarter of increasing sales growth and the maximum growth rate in Construction since the first half of 2012.
The Utilities business continues to see good growth, attributable to new wins and an improving distribution business with existing utility customers. Sales in this segment grew 8% this quarter. This marks the 15th consecutive quarter of year-over-year sales growth for this segment. The company saw new customer wins and growing business at existing customers during the quarter. It also won a multiyear integrated supply contract with a large utility for generation, transmission, substation and distribution products and services, during the quarter.
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 7%, making it the sixth consecutive quarter of year-over-year sales growth. Growth was attributed to expansion in the global customer base. Also, the One WESCO initiative for CIG customers helped sales in the quarter.
Margins
Gross profit was $402.2 million, or 20.2% of sales, compared with $422.4, or 20.3% of sales, in the prior quarter and $376.2 million, or 20.0% of sales, in the fourth quarter of 2013. Gross margin was down 17 bps from the prior quarter but up 15 bps from the year-ago quarter. The decline was primarily due to stronger direct ship sales.
Operating profit of $124.2 million (or 6.2% of sales) was more or less consistent with $133.2 million (6.4%) in the previous quarter but was higher than $110.6 million (5.9%) in the year-ago quarter.
WESCO’s net income was $73.7 million (or a net margin of 3.7%), down from $80.8 million (3.9%) in the previous quarter but up from $58.0 (3.1%) in the year-ago quarter.
Balance Sheet
Cash and cash equivalents at the end of the quarter was $128.3 million compared with $110.4 million in the prior quarter. Long-term debt in the fourth quarter was $1.37 billion compared with $1.47 billion in the previous quarter.
Guidance
For the first quarter of 2015, WESCO expects year-over-year revenue increase of at least 5%-7%, including the impact of the three acquisitions completed year-to-date and the Canadian exchange rate at 87 cents per U.S. dollar. Operating margin is expected to be in the range of 5%-5.2%. The tax rate is expected to be roughly in the range of 29%-30%.
For full year 2015, sales are expected to be in the range of 3%-6%. Operating margin is expected to be in the range of 6.1% – 6.3%. All this is expected to result in earnings per share of $5.50 to $5.90 for the year, translating into 6% to 14% growth.
The Canadian dollar has weakened from approximately 87 cents per U.S. dollar to approximately 80 cents per U.S. dollar. If it remains at this level for the remaining year, it will have an approximately 4% negative impact on full year EPS growth.
Free cash flow is expected to be approximately 80% of net income. The effective tax rate is expected to be around 29%.
Conclusion
WESCO reported weak fourth-quarter results with both the top and bottom lines missing the Zacks Consensus Estimate.
But it is encouraging to note that sales in the reported quarter were aided by acquisitions as well as organic growth. WESCO’s business is currently being driven by strengthening end markets and its One WESCO value proposition, which increases 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.
Moreover, acquisitions will remain an important part of its growth strategy and will boost both top and bottom line performances in the near term. Moreover, it will augment its existing product lines and extend its worldwide footprint, thereby improving its overall market position.
Improving macroeconomic conditions in the U.S. and Canada will further drive the company’s performance. However, foreign exchange is expected to remain a headwind.
Currently, WESCO has a Zacks Rank #4 (Sell). Some better-ranked stocks in the technology sector include Sohu.com Inc. (SOHU) sporting a Zacks Rank #1 (Strong Buy), and Borderfree, Inc. (BRDR) and LivePerson Inc. (LPSN), both holding a Zacks Rank #2 (Buy).
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