WESCO International (WCC) announced
fourth-quarter earnings that missed the Zacks Consensus Estimate by
$0.03, or 2.8%. The guidance for 2013 also disappointed.
The Zacks Consensus Estimate for 2013 moved up 59 cents during
the last 60 days, but guidance missed by 14 cents. As a result, the
shares slid 1.35% in extended trading.
Revenue
WESCO reported revenue of $1.64 billion, which was down 0.7%
sequentially and up 3.5% year over year.
Acquisitions and currency positively helped revenue by 4.3% and
0.5%, respectively, excluding which there was a 1.3% decline in
organic revenue from the year-ago quarter. Management stated that
the 2.4% sequential decline in organic sales was in line with
seasonality.
End Market Update
WESCO experienced weakness across all end markets, as demand
slowed down. Utilities were an exception, driven by Hurricane
Sandy-related expenses. Management reported two major customer
wins, one each in the industrial and utilities markets.
WESCO stated that although sales into the
Industrial market slowed down with respect to the
first half of the year, growth was helped by the company’s global
account and integrated supply model, which helped score new
multi-year distribution wins.
Similar to Hubbell (HUB.B), which reported last
week, WESCO is seeing a mixed Construction market,
with international remaining stronger than domestic (backlog down
3% in the U.S. and up 10% internationally) in the last quarter. The
U.S. non-residential construction market remains soft, but there
are signs of improvement that should benefit WESCO in the back half
of the year. Here too, WESCO has been able to buck the trend
through its global account model. The residential construction
story has however turned positive, although WESCO’s limited
exposure to the segment means that there will be no material impact
on WESCO’s results.
The Utilities business continues to see good
growth, which management attributed partly to WESCO’s integrated
supply model and partly to its initiatives in the wind energy
segment. The last quarter also benefited from an additional $12
million in revenue as a result of power restoration efforts related
to Hurricane Sandy. WESCO has steadily improved its offerings on
the transmission side, which has seen it through the recession.
However, the current strength is also attributable to an improving
distribution business, which is the natural result of stronger
construction markets. Construction markets typically provide the
impetus for greater spending by utilities, so any significant
growth at utilities is inevitably linked to the construction
market.
Sales into the CIG market (schools, hospitals,
property management firms, retailers, financial institutions, cable
companies and governmental agencies) were down from last year due
to more difficult comps (WESCO shipped a large datacom government
project in the year-ago quarter).
Margins
The gross margin was 20.5%, up 6 basis points (bps) sequentially
and down 12 bps year over year. WESCO has maintained very steady
gross margins over the past year or so, which is the result of its
global account model and tight cost control.
Operating expenses of $246.0 million were up 4.4% sequentially
and 4.0% from the year-ago quarter. As a result, the operating
margin of 5.6% shrunk 67 bps from the previous quarter and 20 bps
from the year-ago quarter. Significant headcount additions
contributed to the higher expenses (up 18.7% sequentially and 21.9%
year over year) and management expects recruitments to
continue.
Net Income
WESCO reported pro forma net income of $54.6 million, or a 3.3%
net margin, compared to $63.4 million, or 3.8%, in the previous
quarter and $54.8 million, or 3.4% in the year-ago quarter. Our
calculation excludes acquisition-related charges and a loss on debt
extinguishment on a tax-adjusted basis in the quarter.
Excluding the special items, the GAAP net income was $48.6
million ($0.95 a share), compared to $63.4 million (1.25 a share)
in the previous quarter and $54.8 million ($1.12 a share) in the
Dec quarter of 2011.
Balance Sheet
Inventories were up 19.8% sequentially, with inventory turns
down from 8.0X to 6.6X. DSOs were up from 56 to over 57. The cash
balance at the end of the quarter was $86.1 million, down $21.5
million during the quarter.
WESCO generated $98.5 million in cash from operations and spent
$3.6 million on capex, resulting in free cash flow of $94.9 million
during the quarter. The net debt position at quarter-end was $1.62
billion, up $1.03 billion during the quarter.
Guidance
For the first quarter of 2013, WESCO expects year-over-year
revenue increase of at least 12-14% (flat excluding the
contribution from EECOL), gross margin at or above 20.6% range and
operating margin at least 5.5%. The tax rate is expected to be in
the 27-29% range.
For the full year, WESCO expects sales to be up 16-18% on a
consolidated basis (flat in the first half and up mid-single-digits
in the second half excluding EECOL). The gross margin is expected
to be at least 20.7%, with the operating margin at or above 6.2%
and the tax rate at 27-29%. All this is expected to result in an
EPS of $5.75 for the year (well below the Zacks Consensus Estimate
of $5.89).
Conclusion
WESCO’s business is currently being driven by international
strength. The guidance appears rather weak and is indicative of
softer-than-expected industrial markets. Utilities appear to be
doing quite well however, and the company continues to deliver on
its global account and integrated supply model.
While near-term results will be impacted by economic activity,
given the company’s exposure to core segments, such as industrial,
utility, construction and government, we continue to believe in
WESCO’s solid strategies, good operating model, market position and
customer clout.
WESCO shares carry a Zacks Rank #1 (Strong Buy). Other
technology distributors, such as Avnet (AVT) and
Richardson Electrictronics (RELL), with Zacks
Ranks of #1 and #2, respectively are also worth considering.
AVNET (AVT): Free Stock Analysis Report
HUBBELL INC -B (HUB.B): Free Stock Analysis Report
RICHARDSON ELEC (RELL): Free Stock Analysis Report
WESCO INTL INC (WCC): Free Stock Analysis Report
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