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WESCO's Unusual Year Comes to a Close

Lee Samaha, The Motley Fool

Industrial supply company WESCO International's (NYSE: WCC) fourth-quarter results completed a highly variable year for the company. There are a lot of moving parts to WESCO's earnings, so let's try to make sense of what happened and what to expect in 2019.

WESCO International's fourth-quarter earnings: The raw numbers

Starting with the headline numbers from the quarter:

  • Sales increased by 0.7% to $2.01 billion, versus the guidance range of 1% to 4%.
  • Operating margin was 4.5%, compared with 4.1% in the same period last year, and at the high end of the guidance range of 4.3% to 4.6%.
  • Operating profit increased 12% to $91 million.
Stock bulls and bears.

WESCO was pulled in two opposite directions in 2018. Image source: Getty Images

As you can see above, WESCO operates on a slim margin, so it's imperative that management generates margin expansion when sales turn up. Having spent the first half of 2018 generating better-than-expected sales growth but disappointing with margin, the company posted a fourth quarter that saw its sales disappoint while operating margin came in toward the high end of management's guidance range.

The varying conditions in the two halves of 2018 somehow produced a full-year performance that was acceptable compared with initial guidance:

  • Full-year sales grew 6.5% to $8.2 billion versus initial guidance of 3% to 6% growth.
  • Full-year operating margin was 4.3%, compared with 4.2% in 2017, at the low end of initial guidance of 4.2% to 4.6%.

Clearly, WESCO was helped by a strong economy in 2018, but along with many other companies in the industrial sector, rising costs challenged its ability to generate margin expansion. The question is: What will happen in 2019 as economic growth slows?

WESCO's outlook for 2019

As you can see below, the company is going to come up against some difficult comparable growth figures in the first and second quarters of 2019 -- total organic sales growth averaged nearly 10% in the first two quarters of 2018.

WESCO's sales growth.

Data source: WESCO International presentations. 

As such, management guidance for 2019 implies a better second half versus the first. Indeed, when answering a question from William Blair analyst Ryan Merkel on the earnings call, CEO John Engel affirmed that he expects growth to accelerate later in 2019.

WESCO's guidance

First Quarter

Full Year

Sales growth (decline)

(2%) to 2%

3% to 6%

Operating margin

3.5% to 3.8%

4.3% to 4.7%

Data source: WESCO International presentations.

In addition, unlike many of its industrial peers, WESCO's guidance appears to rely relatively more on international growth. "We expect 2019 full-year sales to be up 3% to 6%, reflecting end-market growth of approximately 2% to 5% for the U.S. and Canada and low- to mid-single-digit decrease for our international market," CFO Dave Schulz said on the earnings call.

Looking ahead

In a nutshell, WESCO's full-year 2019 outlook is calling for a modest increase in margin and a relatively weaker first half compared with the second half. When RBC analyst Deane Dray asked about the latter -- specifically the weak-looking sales guidance for the first quarter -- Engel claimed the guidance didn't reflect any issues "that we're hearing from customers or [with] business momentum."

As such, investors should look at the coming first-quarter results in the next three months to see if WESCO maintains its full-year guidance. Meanwhile, they should also watch management's efforts to increase margin in a slowing growth environment.

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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Wesco International. The Motley Fool has a disclosure policy.