WESCO International (WCC) announced
first-quarter earnings that missed the Zacks Consensus Estimate by
$0.05, or 4.3%.
Revenue
WESCO reported revenue of $1.81 billion, which was up 10.0%
sequentially and 12.6% year over year.
The year-over-year increase was the positive impact of
acquisitions, which adding 16 percentage points of growth and was
partially offset by a lower number of working days and a reduction
in organic sales. The sequential increase was the strongest in
years, helped by the EECOL acquisition. The core business performed
in line with normal seasonality.
End Market Update
WESCO is seeing signs of strength across end markets, with a
swelling opportunity pipeline, higher bidding activity and growing
backlog. The Utilities market remains the strongest.
WESCO stated that Industrial distributors
remained conservative and even reduced inventories in some cases.
However, the OEM and MRO sides of the business were consistent with
the year-ago quarter. Year-over-year comps were hard because of
several ongoing industrial capital projects last year that did not
continue into the last quarter. Management was optimistic about the
opportunity pipeline, which continued to expand. The One WESCO
model helped sign up a major telecom provider.
Similar to Hubbell (HUB.B), which also reported
at around the same time, WESCO is seeing a mixed
Construction market. However, WESCO is seeing
improvement in Canada and most other international markets. The
U.S. market, though showing improving trends, again had difficult
comps because of more conducive weather in the year-ago quarter
that pulled some construction business into the 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 has
seen it through the recession. However, the current strength is
also attributable to 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 into the CIG market (schools, hospitals,
property management firms, retailers, financial institutions, cable
companies and governmental agencies) declined for the second
straight quarter.The government side of the business is weaker
because of budget constraints and deferral of project awards.
Margins
The gross margin was 21.1%, up 57 basis points (bps)
sequentially and down 117 bps year over year. WESCO has maintained
very steady gross margins over the past year or so, which is the
result of its integrated model and tight cost control.
Operating expenses of $280.3 million were up 33.5% sequentially
and 18.7% from the year-ago quarter. As a result, the operating
margin of 5.6% shrank 217 bps from the previous quarter and
expanded 37 bps from the year-ago quarter. WESCO took a litigation
charge of $36.1 million in the fourth quarter and a gain of a
similar amount in the last quarter (in recognition of insurance
coverage). The above comparisons exclude the adjustments in the
relevant quarters.
Net Income
WESCO reported pro forma net income of $58.6 million, or a 3.2%
net margin, compared to $90.7 million, or 5.5%, in the previous
quarter and $52.9 million, or 3.3% in the year-ago quarter. Our
calculation excludes the litigation-related adjustments discussed
above.
Excluding the special item, the GAAP net income was $80.6
million ($1.54 a share), compared to $48.6 million ($0.95 a share)
in the previous quarter and $53.0 million ($1.03 a share) in the
Mar quarter of 2012.
Balance Sheet
Inventories were flat sequentially, with inventory turns going
from 6.6X to 7.2X. DSOs were down from 57 to over 55. The cash
balance at the end of the quarter was $116.8 million, up $30.7
million during the quarter.
WESCO generated $80.4 million in cash from operations and spent
$6.0 million on capex, resulting in free cash flow of $74.4 million
during the quarter. The net debt position at quarter-end was $1.56
billion, down $90.9 million during the quarter.
Guidance
For the second quarter of 2013, WESCO expects year-over-year
revenue increase of at least 13-16% (down 1% to up 2% excluding the
contribution from EECOL). The guidance indicates around 6%
sequential increase at the mid-point, better than the Zacks
Consensus and more or less in line with the normal level of a
mid-single-digit sequential increase. The gross margin is expected
to be at or above 20.9% and the operating margin at least 6.0%. The
tax rate is expected to be in the 26-28% range.
WESCO didn’t update its guidance for the year, so we assume it
remains the same. Accordingly, sales are expected to be up 16-18%
on a consolidated basis (flat in the first half and up
mid-single-digits in the second half excluding EECOL). The gross
margin is expected to be at least 20.7%, with the operating margin
at or above 6.2% and the tax rate at 27-29%. All this is expected
to result in an EPS of $5.75 for the year (well below the Zacks
Consensus Estimate of $5.89).
Conclusion
WESCO’s business is currently being driven by strengthening end
markets and its integrated supply model, which is increasing
efficiencies for its customers. The guidance is encouraging and
could be cautious, particularly so if end markets improve as we
move through the year. For the longer term, we continue to believe
in WESCO’s solid strategies, good 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.
WESCO shares carry a Zacks Rank #4 (Sell). Other technology
distributors, such as Avnet (AVT) and
Richardson Electrictronics (RELL), with Zacks
Ranks of #2 and #3 are better stocks to consider at the moment.
AVNET (AVT): Free Stock Analysis Report
HUBBELL INC -B (HUB.B): Free Stock Analysis Report
RICHARDSON ELEC (RELL): Free Stock Analysis Report
WESCO INTL INC (WCC): Free Stock Analysis Report
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