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WESCO (WCC) Q2 Earnings Beat Estimates, Revenues Up Y/Y

Zacks Equity Research

WESCO International, Inc. WCC delivered second-quarter 2019 earnings of $1.45 per share, beating the Zacks Consensus Estimate by a cent. The figure surged 19% from the year-ago quarter.

Net sales of $2.15 billion increased 2.2% year over year. This was driven by the company’s solid momentum across all end-markets. However, sales growth was below management’s guided range of 3-6%.

However, the top line lagged the Zacks Consensus Estimate of $2.18 billion. Sales was impacted by lower growth than expected in the United States, which did offset the company’s strong growth in Canada, and solid momentum across utility and datacom fields during the reported quarter.

The company’s organic sales in the reported quarter improved 1.9% from the prior-year quarter. Favorable pricing and robust growth in Canada in the second quarter remained positive.

The company has lowered guidance for sales growth for the full year as it expects end-market softness to prevail in the second half of the year, which would result in slowdown in sales growth across the markets.

We note that shares of the company have plunged 4.3% following the release of the second quarter results. Additionally, WESCO has lost 6.8% on a year-to-date basis against the industry’s growth of 2.9%.

Nevertheless, the company remains focused toward strategic investments and margin expansion initiatives. Further, WESCO stays confident about its product portfolio strength and value-added services.



Top Line in Detail

WESCO operates in four organized end markets, namely Industrial, Construction, Utility and CIG.

Industrial Market: Organic sales in this market improved 1% from the year-ago quarter, on account of growth of 2% and 6% the United States and Canada, respectively, in local currency. Sales from this market accounted for 36% of total sales. WESCO continued to gain traction across verticals like food processing, petrochemical, and metals and mining, which drove the year-over-year top-line growth within this market during the reported quarter. However, the company noticed weak momentum across certain OEM customers and industrial oriented contractors.

Nevertheless, strengthening integrated supply opportunities and bidding activity levels acted as tailwinds for WESCO during the second quarter. Moreover, increasing production and capacity utilization continued to act as catalysts.

Construction Market: Organic sales increased 2.6% year over year, with 9% growth in Canada in local currency. Sales from this market accounted for 33% of total sales. The company’s growing momentum across construction contractors and customers drove the top line in this market. Additionally, strong backlog and project activity levels remained positive for the company.

However, U.S. sales were down 1% year over year in the second quarter. This can be attributed to weak momentum across industrial oriented contractors, which offset sales growth to commercial construction contractors in the United States.

Utility Market: Sales from this market contributed 16% to WESCO sales. The company experienced year-over-year sales growth of 3.3% in this market. This was driven by 6% growth in U.S. in local currency. Growing traction among investor owned utility, public power and utility customers remained positive throughout the reported quarter. Further, growing construction market and rising demand for renewable energy continued to be tailwinds.

However, the company witnessed a decline of 28% in sales during the reported quarter owing to non-renewal of a contract.

CIG Market: The company witnessed year-over-year improvement of 1.4% in organic sales in this market, driven by strong performance in Canada and the United States where sales grew 10% and 1%, respectively. This was attributed to its robust supply chain solutions, which aided performance in data center and cloud technology projects. Further, value-added services in retrofit applications, LED lighting renovations, Fiber-to-the-X deployments and broadband build outs remained positives.

WESCO International, Inc. Price, Consensus and EPS Surprise

 

WESCO International, Inc. Price, Consensus and EPS Surprise

WESCO International, Inc. price-consensus-eps-surprise-chart | WESCO International, Inc. Quote

Operating Details

Gross margin was 19% in the reported quarter, which remained flat compared with the year-ago quarter.

Selling, general and administrative expenses (SG&A), as a percentage of revenues, were 13.8%, contracting 10 bps on a year-over-year basis.

Consequently, WESCO’s operating margin came in at 4.6%, expanding 30 bps from the prior-year quarter.

Balance Sheet & Cash Flow

As of Jun 30, 2019, cash & cash equivalents were $87.2 million, down from $106.1 million as of Mar 31, 2019. Long-term debt in second-quarter 2019 was $1.39 billion compared with $1.21 billion at the end of first-quarter 2019.

Additionally, WESCO utilized $37.7 million of cash from operations in the reported quarter against $28.9 million of cash generated from operations at the end of the first quarter.

Free cash flow in the quarter was ($48.3) million compared with $18.1 million in previous quarter.

Guidance

For third-quarter 2019, WESCO expects sales growth in the range of 3% to 5%. The Zacks Consensus Estimate is pegged at $2.17 billion

Operating margin is expected to be in the range of 4.3-4.7%. Effective tax rate is projected at 22% for the second quarter.

For 2019, WESCO revised outlook for sales growth downward from 3-6% to 1-4%. The Zacks Consensus Estimate for 2019 sales is pegged at $8.52 billion. Currency headwinds are expected to offset benefits from SLS buyout.

Earnings are now anticipated to be in the range of $5.00-$5.60 per share, which is lower than the previously guided range of $5.10-$5.70. The Zacks Consensus Estimate is pegged at $5.37.

Operating margin is expected between 4.2-4.5%, lower than 4.3-4.7% which was guided in the previous quarter.

Zacks Rank & Key Picks

WESCO currently has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Rosetta Stone RST, Oracle ORCL and CACI International CACI. While Rosetta Stone sports a Zacks Rank #1 (Strong Buy), Oracle and CACI carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Rosetta Stone, Oracle and CACI is currently projected to be 12.5%, 9.8% and 10%, respectively.

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