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Risk-Reward With Wesco

- By Jonathan Poland

The continued demand for capital projects will benefit Wesco International Inc. (WCC) on both the top and bottom lines for some time as customers are spending more to upgrade infrastructure in both the private and public sectors. Additionally, the market is undervaluing Wesco as the stock trades at a discount against both industry averages and its own historical price multiples. Even with the concerns of a global economic slowdown leading to project deferrals in certain areas, the company's size and scale will help insulate it from any prolonged drawdowns.


Amazon (AMZN) could disrupt the industrial distribution industry, taking market share and putting pressure on the company's already thin margins. Yet, while other public industrial distributors generate higher margins and pay dividends, Wesco's global footprint and focus on value-added services should help it retain market share from encroachment by smaller regional and local distributors.

Wesco is a conduit between 26,000 suppliers and 70,000 customers who see the company as a one-stop shop for all their supply chain needs and find value in the company's large assortment of products and ability to streamline the procurement process. Suppliers rely on the company's large customer base and expert salesforce as a source of growth. This symbiotic relationship is wildly successful financially.

The Pittsburgh-based company booked solid financial results in 2018, with 6.5% sales growth and 22.6% earnings growth. It started 2019 with the acquisition of Sylvania Lighting Solutions from OSRAM Sylvania, adding over $100 million in sales to Wesco's top line while keeping the CEO and staff in place. Sylvania has a range of lighting options and renovation solutions to help increase Wesco's presence in this emerging category.

In the last decade, Wesco has done a great job on all fronts, increasing sales from $4.6 billion to over $8.1 billion, improving earnings from $105 million to over $227 million and building book value from $23.49 per share to $47.64. It's a good business, generating north of $300 million in cash flow and spending $36 million in capital expenditures.

It has over $1.3 billion in working capital and carries a market capitalization of $2.6 billion. If it were priced on par with the annual sales turnover, investors would be looking at an $8 billion value. Instead, the company is trading at 30% of sales and just 1.2 times book value.

Wesco is expected to earn over $5.50 this year and over $6 in 2020. If that does come to fruition, investors are looking at a $72 to $106 range for the stock based on current and historical price-earnings ratios. Even on the low end, that should be enough to outperform the S&P 500 over the same period.

Disclosure: I am not long or short WCC.

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This article first appeared on GuruFocus.