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What Makes WESCO International (WCC) an Attractive Investment in the Current Environment?

Merion Road Capital, an investment advisor, released its first-quarter 2023 investor letter. A copy of the same can be downloaded here. In the first quarter, Merion Road Small Cap Fund fell 1.6% compared to a 2.7% return for the Russell 2000 Index and 2.7% for the Barclay Hedge Fund Index. Furthermore, MRCM Long Only Large Cap returned 14% compared to a 7.4% return for the S&P 500 Index. In addition, you can check the top 5 holdings of the fund to know its best picks in 2023.

Merion Road Capital highlighted stocks like WESCO International, Inc. (NYSE:WCC) in the first quarter 2023 investor letter. WESCO International, Inc. (NYSE:WCC) is a supply chain solutions provider headquartered in Pittsburgh, Pennsylvania. On April 21, 2023, WESCO International, Inc. (NYSE:WCC) stock closed at $142.10 per share. One-month return of WESCO International, Inc. (NYSE:WCC) was 0.27%, and its shares gained 13.27% of their value over the last 52 weeks. WESCO International, Inc. (NYSE:WCC) has a market capitalization of $7.283 billion.

Merion Road Capital made the following comment about WESCO International, Inc. (NYSE:WCC) in its Q1 2023 investor letter:

"I started buying WESCO International, Inc. (NYSE:WCC) at the end of last year. I continued adding this year and have made it a mid-level position. WCC is a $23bn distributor of electrical, communications, and utility products. They completed the acquisition of Anixter in 2020, which doubled the size of the company and gave them exposure to higher-growth end markets. By all accounts, this acquisition has been a homerun. Cross-selling synergies initially targeted at $170mm hit over $700mm by end of 2022 and management is currently targeting $1.2bn. Similarly, cost savings set at $200mm within 3 years are expected to reach over $300mm in 2023.

WCC seems ideally positioned to succeed in the current environment. Their communications and security solutions division accounts for 30% of their revenue and will benefit from increasing demand of automation, connectivity (5G, LTE, remote/hybrid work), and digitalization. Utility and broadband represent another 29% of their revenue and will benefit from grid modernization, green energy, and rural broadband initiatives. The electrical and electronic solutions segment, representing 40% of revenue, is perhaps the most cyclical of the bunch. Revenue in this segment is split amongst construction, industrial, and original equipment manufacturers. Construction predominately serves non-residential projects and includes things like electrical, solar, and network/security projects which should grow over time. Industrial is relatively diversified across various industries including metals/mining, food/beverage, chemicals, and oil/gas. All three segments should benefit from increasing public sector infrastructure spending coming out of the $1.2 trillion Infrastructure Investment & Jobs Act, $369 billion Inflation Reduction Act, $53 billion CHIPS and Science Act, and $20 billion Rural Digital Opportunity Fund.

Management believes that they can achieve mid-single digit organic revenue growth which consists of base market growth plus a 1-2 percentage points for their secularly growing end-markets and another 1- 2 for share gains. They have the goal of reaching 10% EBITDA margins which would bring them closer to other leading industrial distributors. While performance has been strong (revenue grew 18% last year organically and EBITDA margins expanded from 6.3% to 7.9%), the economic outlook is obviously a little more daunting. Using LTM figures WCC is trading at just 8x EPS. Management plans to allocate 40% of its operating cashflow to share returns (they have a $1bn share repurchase authorization which represents ~15% of market cap) with another 40% towards value creation through investments/M&A."

Container with train and plane
Container with train and plane

Copyright: khunaspix / 123RF Stock Photo

WESCO International, Inc. (NYSE:WCC) is not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 39 hedge fund portfolios held WESCO International, Inc. (NYSE:WCC) at the end of the fourth quarter which was 43 in the previous quarter.

We discussed WESCO International, Inc. (NYSE:WCC) in another article and shared Choice Equities Capital Management's views on the company. In addition, please check out our hedge fund investor letters Q1 2023 page for more investor letters from hedge funds and other leading investors.


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Disclosure: None. This article is originally published at Insider Monkey.