A month has gone by since the last earnings report for Wesco International (WCC). Shares have lost about 3.5% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Wesco International due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
WESCO Q2 Earnings Beat, Revenues Miss Estimates
WESCO International 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%.
Further, 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.
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.
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.
For third-quarter 2019, WESCO expects sales growth in the range of 3% to 5%.
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%. 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.
Operating margin is expected between 4.2-4.5%, lower than 4.3-4.7% which was guided in the previous quarter.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -6.68% due to these changes.
Currently, Wesco International has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Wesco International has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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