If you are currently a shareholder in WESCO International Inc (NYSE:WCC), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. This difference directly flows down to how much the stock is worth. Operating in the industry, WCC is currently valued at US$2.4b. I’ve analysed below, the health and outlook of WCC’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.
Is WESCO International generating enough cash?
WESCO International generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
There are two methods I will use to evaluate the quality of WESCO International’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
WESCO International’s yield of 5.35% last year indicates its ability to produce cash at the same rate as the market index, taking into account the company’s size. However, given that the risk for holding single-stock WESCO International is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Is WESCO International’s yield sustainable?
Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at WCC’s expected operating cash flows. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 21%, ramping up from its current levels of US$242m to US$293m in three years’ time. Furthermore, breaking down growth into a year on year basis, WCC is able to increase its growth rate each year, from 5.5% in the upcoming year, to 9.0% by the end of the third year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
WESCO International’s positive operating cash flow is encouraging, and its yield is relatively similar to the market index. However, you are taking on more risk by holding a single-stock rather than the well-diversified market index. This means, in terms of risk and return, it’s not the best deal. Now you know to keep cash flows in mind, I recommend you continue to research WESCO International to get a better picture of the company by looking at:
- Valuation: What is WCC worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether WCC is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on WESCO International’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.