WESCO International: Slight Upside to Quarter and Optimistic First Look at 2015 Possible

The key conclusion from the second quarter was that Wesco was finally seeing a broad-based recovery across all end-markets and geographies. Management also lowered the bar for gross margin and announced cost-cutting actions. Based on our surveys, we believe organic growth continued at a 6%-plus pace in August and September. We expect to hear that nonresidential construction activity continued to pick up. Industrial activity is also improving, but at a more moderate level. These trends give us confidence that Wesco will hit third-quarter sales and earnings estimates. Sales growth accelerated each month of the second quarter, with June up 7.5% and early July running up 6%-plus. We forecast third-quarter sales growth of 7%, at the top of guidance and above consensus of 6% growth. On gross margin, our sense is that mix will be slightly more favorable in the third quarter than the second quarter. Our SG&A forecast of $276 million is down $3 million sequentially, but could be down more given cost reduction actions and considering historical seasonality. We believe consensus EPS at $1.51 has slight upside.

Assuming third-quarter EPS are in the low-$1.50 range, fourth-quarter EPS would need to be roughly flat sequentially to hit the midpoint of full-year guidance at $5.30. Management commentary on the second-quarter conference call confirmed this cadence. Historically, fourth-quarter EPS step down from the third quarter because of lower sales and a lower operating margin, but the addition of EECOL has lessened historical seasonality. This year, management expects disciplined cost controls to boost fourth-quarter EPS. Full-year guidance was reduced to $5.20-$5.40 last quarter, mainly because of lower gross margins. We believe gross margins have stabilized at current levels, with Canadian growth picking up and industrial demand improving. We view $5.30-$5.35 as the most likely outcome for the year.

In the past, management had provided initial financial guidance for the following year at its August investor day. This year Wesco plans to provide 2015 guidance in early December, but may give some initial high-level end-market color with third-quarter results. Given the broad-based improvement Wesco discussed last quarter, we suspect the initial look at 2015 could be biased positively. At $78, shares currently trade at 9.4 times 2015 EBITDA. This compares with a five-year average of 8.0 times. We are buyers at current levels with a reasonable valuation and the chance for numbers to move materially higher if nonresidential construction recovers and investment in OneWesco lifts organic sales momentum. Wesco remains a favorite name to play U.S. nonresidential construction, which appears to be finally gaining momentum.



Lisa has a bachelor’s degree in Business Management that she got from Cincinnati Christian University, where she graduated in 2008. After she graduated, she moved to Atlanta - Georgia and immediately started working as a human resource administrator. Now, she writes news stories for the Business & Financials, breaking news sections.