WESCO (WCC) Down 1.9% Since Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for WESCO International, Inc. WCC. Shares have lost about 1.9% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

WESCO  Surpasses Q1 Earnings and Revenue Estimates

WESCO’s first-quarter 2017 adjusted earnings per share (EPS) of 76 cents beat the Zacks Consensus Estimate by 5.6% or 4 cents. However, earnings decreased 26.3% sequentially and 1.3% year over year. Revenues of $1.77 billion surpassed the Zacks Consensus Estimate of $1.76 billion by a slight margin.

Revenues

WESCO’s reported revenues were down 1.2% sequentially (in line with guidance) and 0.2% year over year. Organic sales were down 1.7% largely offset by positive effects of AED acquisition and foreign exchange.

Acquisitions offset the decline in the core business, contributing 0.9% to the top line. Foreign exchange had a 0.6% negative impact on revenues. 

End Market Update

Industrial End Market: WESCO stated that sales from the Industrial end market were up 2% year over year. This was mainly driven by 3% year-over-year sales growth in the U.S. and sequential sales growth in oil and gas, metals and mining and OEM customers.

Construction End Market: The Construction market was down year over year with U.S. down 6%. However, this was partially offset by Canada, which was up 3% on a local currency basis. Sales decline at industrial oriented contractors in the U.S. was partially offset by sales growth at commercial contractors.

Outside the industrial and construction markets, the company remains modestly positive about the non-residential construction market.

Utility End Market: Sales to the Utilities market were up 6% with both the U.S. and Canada growing 10% in local currency. The company has been performing well across all customer groups - investor-owned utilities utility contractors and public power customers. Through 2016, WESCO has witnessed sales growth for five years consecutively from value creation and scope expansion with utility customers. In the first quarter, the company received a multiyear contract from a current investor-owned utility customer to provide power delivery materials and project management services.

CIG End Market: Sales to the CIG market were down in the U.S. while Canada grew in double digits. During the quarter, lower datacom sales considerably offset growth in broadband, security and government.

WESCO sees growth opportunities at government customers, data center, cloud technology projects, Fiber-to-the-X deployments, as well as cyber and physical security for critical infrastructure protection.

Margins

Gross profit was $350 million, or 19.7% of sales. Gross margin was up 31 basis points (bps) sequentially but down 25 bps from last year. The decline was mainly due to lower-than-expected revenues and unfavorable mix.

Operating expenses of $282.9 million were up 6.2% sequentially but down 1% from the last year. While selling, general and administrative expenses increased, depreciation and amortization expenses decreased sequentially as a percentage of sales.

Operating profit of $67.1 million (or 3.8% of sales) was down 79 bps sequentially and 13 bps from a year ago.  

Balance Sheet

Cash and cash equivalents at the end of the first quarter was $103 million compared with $110.1 million at the end of the fourth quarter. Long-term debt was $1.31 billion compared with $1.36 billion in the fourth quarter.

The company generated $47.6 million in cash from operations. Capex was $4.5 million.

Free cash flow stayed strong and surpassed 100% of net income.

Guidance

The company expects second quarter sales to be down 2% to up 1%. Operating margin is expected within 4.2% to 4.6%.

For 2017, the company expects sales to be flat to up 4% while EPS is expected in the range of $3.60 to $4. The company targets increasing its free cash flow to at least 90% of net income.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There has been one downward revision in the current quarter. 

WESCO International, Inc. Price and Consensus

 

WESCO International, Inc. Price and Consensus | WESCO International, Inc. Quote

VGM Scores

At this time, WESCO's stock has a nice Growth Score of 'B', a grade with the same score on the momentum front. However, the stock was allocated a grade of 'A' on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'A'. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for value investors.

Outlook

While estimates have been moving downward, the magnitude of the revision is net zero. The stock has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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