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WESCO (WCC) Q4 Earnings Up Y/Y, Revenues Miss Estimates

Zacks Equity Research

WESCO International, Inc. WCC reported fourth-quarter 2018 earnings of $1.26 per share, which surged 168.1% on a year-over-year basis.

Strong operating results, a lower tax rate and the benefit of share repurchases led to the year-over-year improvement in the bottom line. The Zacks Consensus Estimate was pegged at $1.26.

Net sales of $2.01 billion missed the Zacks Consensus Estimate of $2.06 billion. However, the figure increased 0.7% on a year-over-year basis. Additionally, organic sales in the reported quarter grew 1.5% from the prior-year quarter. The year-over-year sales growth was primarily due to favorable pricing.

WESCO International, Inc. Price, Consensus and EPS Surprise

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

Top Line in Detail

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

Industrial Market: The company recorded 1% year-over-year growth in organic sales, reflecting flat sales in the United States and 10% growth in Canada in local currency. WESCO noted that growth in verticals like food processing, paper, metals and mining and pulp was offset by decline in petrochemical market.

Moreover, during the quarter, the company won a three-year contract worth more than $30 million to provide “Integrated Supply solution for MRO materials” for a U.S. metals manufacturer.

Construction Market: Organic sales increased 1% year over year, with 1% growth in the United States and 3% growth in Canada in local currency. Additionally, WESCO stated that it continues to increase its share in the growing Canadian construction market.

In the reported quarter, backlog was down 5% sequentially and 3% year over year due to seasonality. However, the company expects continuous investment in non-residential construction projects, indicating positive momentum.

Notably, in the first-quarter 2019, WESCO won a multimillion-dollar contract to “provide electrical equipment to support the construction of a new LNG facility in North America.” However, stiff labor market and pricing related to tariff increased prices for a few projects in the construction market.

Utility Market: The company experienced year-over-year sales decline of 5% in this market. This was due to 3% decline in U.S. sales and a decline of 23% in Canada in local currency. Sales in Canada were down as WESCO could not renew a contract.

However, in the ongoing quarter the company is strengthening relationships with investor-owned utility, public power and utility contractor customers. Further, WESCO expects to benefit from the growing need for renewable energy. Notably, in the current quarter, the company has won a five-year contract worth about $35 million to provide electrical and MRO materials.

CIG Market: The company recorded 12% year-over-year improvement in organic sales in this market, driven by strong performance in Canada (27% growth in local currency) and 1% growth in the United States.

The upside was driven by strong growth in LED lighting solutions, fiber-to-the-X deployments, broadband build-outs, as well as physical and cyber security for critical infrastructure protection.

Recent Updates

In the quarter, WESCO announced the acquisition of Sylvania Lighting Solutions (SLS) from Osram Sylvania for about $28 million. The acquisition, which is expected to close by March 2019, will have no effect on WESCO’s results for the first year, per management.

Notably, SLS, a leading provider of turnkey lighting services and LED lighting solutions, has annual revenues of about $100 million in both the United States and Canada.

Operating Details

Gross margin was up 19.4% in the reported quarter, up 20 basis points (bps) from the year-ago quarter on operational efficiencies.

Selling, general and administrative expenses (SG&A), as a percentage of revenues, were 14.1%, which contracted 20 bps on a year-over-year basis due to lower costs.

WESCO’s operating profit came in at $90.5 million, up 11.9% from the prior-year quarter. However, operating margin contracted 40 bps from the year-ago quarter to 4.5%.

Balance Sheet & Cash Flow

As of Dec 31, 2018, cash & cash equivalents were $96.3 million compared with $142.8 million in the third quarter. Long-term debt was $1.17 billion compared with $1.23 billion at the end of third-quarter 2018.

Additionally, WESCO generated $122.2 million in cash from operations in fourth-quarter 2018, up from $87.7 million at the end of the third quarter.

Free cash flow in the quarter was $109.7 million, up from $80.4 million in third-quarter 2018 primarily due to efficient business operation. Moreover, WESCO purchased $100 million worth of shares in fourth-quarter 2018.

Guidance

First-Quarter 2019

For first-quarter 2019, WESCO expects sales growth in the range of (2%) to 2%. Operating margin is expected to be in the range of 3.5-3.8%.

Full Year

For 2019, WESCO expects sales growth in the range of 3-6%, reflecting 2-5% growth in the United States and Canada. However, international market sales are anticipated to decline in the low-to mid-single digit. The Zacks Consensus Estimate for 2019 sales is pegged at $8.57 billion.

Operating margin is expected to be 4.3-4.7% and EPS is anticipated to be in the range of $5.10-$5.70. WESCO expects to see growth in industrial markets in 2019.

Zacks Rank and Stocks to Consider

Currently, WESCO has a Zacks Rank #4 (Sell).

Some better-ranked stocks in the broader technology sector are Twitter TWTR, Lumentum Holdings LITE and HubSpot HUBS. While Twitter sports a Zacks #1 Rank (Strong Buy), Lumentum and HubSpot 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 Twitter, Lumentum and HubSpot is projected to be 22.1%, 17% and 50%, respectively.

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