Our Long-Term View of Wesco Remains Intact, Despite Near-Term Pressure

Equity Analyst

Dawit Woldemariam

In 1994, Westinghouse Electrical sold its electrical distribution business, Westinghouse Electric Supply, or Wesco, to a private equity firm. Wesco went public in 1999. Since its separation from Westinghouse, Wesco has used most of its cumulative free cash flow on acquisitions, which have expanded its scale, diversified revenue, and fueled a meaningful portion of the company’s growth. Once squarely focused on construction end markets, Wesco now serves a much broader array of customers across industrial, construction, utility, commercial, institutional, and government markets.

Wesco operates in very fragmented markets, but its large scale, global footprint, expansive product portfolio and supplier base, and service offerings differentiate it from smaller local and regional competitors. Service offerings, such as vendor-managed inventory, efficiency assessments, product repairs, and training, generate a meaningful portion of Wesco’s sales and are key components of the company’s value proposition to customers. Wesco’s size is also an important competitive advantage because the company has the scale to serve large, multinational clients anywhere in the world.

Wesco doubled in size after it completed its acquisition of close peer Anixter in June 2020. We expect the merger to be value-accretive to Wesco's shareholders. Management is targeting $315 million of cost synergies and $2 billion of cross-sales synergies by 2023, which we think is achievable.

As the U.S. economy recovers from the COVID-19 pandemic, we believe a combination of factors, including normalizing industrial demand and pricing, the Anixter acquisition, and a continued trend of customers consolidating their spending with larger distributors, will provide ample opportunity for Wesco to gain market share and grow faster than its end markets. As Wesco expands its top line, we expect operating margins will improve as it realizes operating leverage and synergies from the Anixter acquisition. Improving gross profit margin performance due to price increases and internal initiatives should also support better profit margins.

Business Strategy & Outlook

We assign Wesco a narrow economic moat rating because we believe the firm's competitive positioning will allow it to generate excess returns over the next decade. Our confidence is rooted in Wesco’s ability to fend off competitive pressures from both new and existing players in the electrical distribution, network and security, and utility power markets.

Wesco has a long history of being a trusted partner in capital projects (accounts for about half of sales). Construction contractors can count on Wesco to provide the products and services needed to drive efficiency throughout the project life cycle, including the design phase. For contractors, a project starts with a request-for-proposal, where contractors request specific products or services from suppliers and then move into a pricing discussion. It’s in contractors’ best interest to keep project costs as low as possible, which creates a competitive bidding process for distributors like Wesco to win the right to supply and service a given capital project. This explains Wesco’s lower margin profile as compared with more MRO-focused distributors, such as Grainger. While competitive bidding limits Wesco’s ability to charge higher prices, the company drives profitability through its cost advantage. Wesco’s size allows it to operate at a lower per unit cost compared with smaller distributors, largely due to the volume rebates it secures from suppliers. We believe it’s important to note that Wesco can charge higher prices for its inventory management services than transaction-only distributors (do not provide services). In capital projects, Wesco delivers and stages products, handles material, manages cables, and provides job trailers to store items until they’re needed on contractors’ job sites. These services help cut down on project costs, improve productivity and allow contractors to complete projects on schedule. Even though the company’s services promote some level of pricing power, we think these capabilities are replicable by other players and do not establish a moat source. 

Wesco’s economies of scale have led to strong returns on invested capital, or ROICs, historically, averaging approximately 18% on average (excluding goodwill) over the past two decades. Throughout its history as a public company, Wesco has also turned to acquisitions as a key growth driver. The company hasn’t recorded any goodwill impairments but ROICs have been constrained when goodwill is considered (11% on average since 1998). That said, we think Wesco’s acquisition of Anixter (global leader in network and security solutions) was a good move (acquired the business for less than its fair value) and will help improve its scale and present opportunities to cross-sell products. On a pro forma basis, we estimate the combined business holds approximately 10% market share in network and security and utility power markets, respectively. In electrical distribution, Wesco holds about 1% share of the much larger and fragmented market based on our estimates. Wesco’s strong presence in these markets and high-touch model sets it apart from both smaller industrial distributors and online players like Amazon Business, and its vendor managed inventory programs separate it from other large distributors.

The North American industrial distribution market is highly fragmented, with the largest players primarily benefiting from scale-driven cost advantages over smaller competitors that lack both scale and a global reach. We think Wesco’s operating margins have historically been at least 200 basis points higher than small electrical distributors. As a large industrial distributor in North America, Wesco benefits from volume-based rebates (lower per unit cost) and other sales incentives that would be unavailable to smaller distributors. Furthermore, we believe Wesco often receives preferential treatment from suppliers in the form of marketing support and product training, which, in turn, help Wesco more cost-efficiently promote its products and provide customer support.

The company’s efficient global sourcing and distribution network is another source of scale-driven cost advantages. The firm has approximately 800 branches and 43 distribution centers. Wesco’s scalable distribution network and centralized order fulfillment centers allow the company to cost-effectively serve its customer base, including multi-national customers that require consistent product availability and service quality around the globe. We believe Wesco’s technological capabilities, including its e-commerce sales channel, integrated customer purchasing and supply chain solutions, and warehouse automation, drive distribution efficiencies that would be difficult for smaller competitors to replicate. 

We believe the company’s leadership position in numerous markets and supply chain solutions increase its value proposition with customers. The company offers customers a wide variety of inventory management solutions, which help strategic source products, replenish inventory online, and place dedicated inventory at customers’ job sites. Wesco’s project management systems allow customers to move through the capital project life cycle efficiently. These inventory management programs are tailored for customers with planned inventory spending. We think Wesco will be able to land more planned spend customers and expand its wallet share. 

An increasing number of companies have been consolidating their spending with large national distributors. Vendor consolidation allows customers to simplify their procurement processes and leverage their buying power. Because Wesco has national scale, a global reach, and a robust portfolio of products and inventory management services, the company is well positioned to capitalize on this trend and take share from smaller local and regional distributors that do not have the scale to profitably service these customers. Although national accounts can generate lower gross profit margins, they also generate much higher volumes, which Wesco can leverage to improve operating margins. 

The Amazon Business threat to industrial distributors is less of a concern for us today than it was a few years ago. The company has certainly grown over the past decade, but not at the expense of Wesco. Amazon does not have any experience bidding on capital projects, and we do not expect Amazon to enter this market anytime soon. Furthermore, we believe it would be difficult for Amazon to upend Wesco’s entrenched position in numerous markets, given its strong relationships with customers. Amazon Business primarily serves small businesses, while Wesco’s high-touch model caters to the needs of large enterprises. Moreover, Wesco provides its customers supply chain solutions, as opposed to Amazon Business, which primarily focuses on online order fulfillment. Additionally, Amazon Business has experienced strong growth in the highly fragmented MRO market without having to make significant incremental investments into building out a high-touch business. We believe Amazon’s strategy will be focused on growing its endless assortment businesses (selling MRO products online), rather than trying to compete with Wesco in high-touch sales (integrated supply services) in several markets. 

In our view, Wesco does not have environmental, social, and governance risks that could result in material value destruction. The most significant ESG risk the firm faces is human capital risk--that is, the risk that Wesco is unable to adequately recruit, train, and retain the talent needed to sell its products and services and manage its supply chain, which could lead to lost market share. While a tight labor market remains a challenge for many companies, including Wesco, we think the firm has adequately managed this risk. We think human capital risk is a greater challenge for some of Wesco's smaller competitors that have fewer resources to manage this risk.

Narrow

Economic Moat

WESCO

WESCO International, Inc. is a holding company, which engages in the provision of electrical, industrial, communications maintenance, repair and operating, and original equipment manufacturers products. It also offers construction materials, and supply chain management and logistics services. Its product categories include general supplies, wire, cable and conduit, communications and security, electrical distribution and controls, lighting and sustainability, and automation, controls, and motors. The company operates through the following segments: Electrical & Electronic, Communications & Security, and Utility & Broadband Solutions. The Electrical & Electronic Solutions segment supplies a broad range of products and supply chain solutions primarily to the construction, industrial and original equipment manufacturer markets. The Communications & Security Solutions segment supplies products and customized supply chain solutions to customers in a diverse range of industries including technology, finance, telecommunications service providers, transportation, education, government, healthcare, and retail. The Utility & Broadband Solutions segment supplies electrical transmission and distribution products, power plant maintenance, repair and operations supplies and smart-grid products, and arranges materials management and procurement outsourcing for the power generation, power transmission and electricity distribution industries. The company was founded in 1993 and is headquartered in Pittsburgh, PA.

Earnings data Q4 2023

Revenue

Cost of revenue

Gross profit

Operating expenses

SG&A

Other

Operating income

EBITDA

Net income

Earnings per share

Total assets

Current assets

Cash & equivalents

Receivables

Inventory

Non-current assets

Net PPE

Intangibles

Total liabilities

Current liabilities

Short term debt

Income tax payable

Non-current liabilities

Long-term debt

Total equity

Stockholders equity

Minority interest

Total liabilities & equity

Total debt

Net debt

Book value per share

Cash from operations

Funds from operations

Change in working capital

Cash from investing

Capital expenditure

Purchase/sale of investments

Purchase/sale of business

Other sources

Cash from financing

Change in stock

Change in debt

Cash dividends paid

Cash from other sources

Net change in cash

Free cash flow

WESCO International, Inc. is a holding company, which engages in the provision of electrical, industrial, communications maintenance, repair and operating, and original equipment manufacturer products. It also offers construction materials, and supply chain management and logistics services. Its product categories include general supplies, wire, cable and conduit, communications and security, electrical distribution and controls, lighting and sustainability, and automation, controls, and motors. The company operates through the following segments: Electrical & Electronic, Communications & Security, and Utility & Broadband Solutions. The Electrical & Electronic Solutions segment supplies a broad range of products and supply chain solutions primarily to the construction, industrial and original equipment manufacturer markets. The Communications & Security Solutions segment offers products and customized supply chain solutions to customers in a diverse range of industries including technology, finance, telecommunications service providers, transportation, education, government, healthcare, and retail. The Utility & Broadband Solutions segment provides electrical transmission and distribution products, power plant maintenance, repair and operations supplies, and smart-grid products, and arranges materials management and procurement outsourcing for the power generation, power transmission and electricity distribution industries. The company was founded in 1993 and is headquartered in Pittsburgh, PA.

PITTSBURGH--(BUSINESS WIRE)--3Q21 WESCO Earnings Card Announcement

WESCO Announces Third Quarter 2021 Earnings Call

Wesco International (WCC) saw its shares surge in the last session with trading volume being higher than average. The latest trend in earnings estimate revisions could translate into further price increase in the near term.

Wesco International (WCC) Moves 4.1% Higher: Will This Strength Last?

Commercial Metals

CNH Industrial NV

Macy's

Nutrien

CNH Industrial (CNHI), Nutrien (NTR), WESCO International (WCC), Macy's (M) and Commercial Metals Company (CMC) are five stocks with explosive relative price strength.

Scoop Up These 5 Stocks Reflecting Relative Price Strength

Raymond James analyst Sam Darkatsh raised WESCO International, Inc. (NYSE:WCC) price target to $145 (implying an upside of 23.5%) from $140 and maintained a Strong Buy rating on the shares. Darkatsh notes better than expected near-term business conditions and pricing.

WESCO Price Target Raised At Raymond James - Read Why

Does Wesco International (WCC) have what it takes to be a top stock pick for momentum investors? Let's find out.

Wesco International (WCC) Is Up 0.92% in One Week: What You Should Know

If you are looking for stocks that have gained strong momentum recently but are still trading at reasonable prices, Wesco International (WCC) could be a great choice. It is one of the several stocks that passed through our 'Fast-Paced Momentum at a Bargain' screen.

Looking for a Fast-paced Momentum Stock at a Bargain? Consider Wesco International (WCC)

Wesco International (WCC) has been upgraded to a Zacks Rank #1 (Strong Buy), reflecting growing optimism about the company's earnings prospects. This might drive the stock higher in the near term.

Wesco International (WCC) Upgraded to Strong Buy: Here's Why

Argo Group International Holdings Ltd

Crestwood Equity Partners

FTAI Aviation Ltd

RLJ Lodging Trust

Siriuspoint Ltd

In Part 1, we covered the basics of preferred stocks. Now we get a little more advanced.

Preferred Stocks Explained - Part 2

Wesco International (WCC) could produce exceptional returns because of its solid growth attributes.

3 Reasons Why Growth Investors Shouldn't Overlook Wesco International (WCC)

PITTSBURGH--(BUSINESS WIRE)--WESCO International, Inc. (NYSE: WCC), a leading provider of business-to-business distribution, logistics services and supply chain solutions, announces the election of Anne M. Cooney to its Board of Directors, effective September 1, 2021, consistent with its long-standing commitment to ongoing Board refreshment. Ms. Cooney served as President of the Process Industries and Drives Division of Siemens Industry, Inc., a division of Siemens AG, from October 2014 until h

WESCO International, Inc. Announces Election of Anne M. Cooney to Board of Directors and Retirement of Lynn M.

InterDigital

Kulicke & Soffa Industries

MercadoLibre

KLIC, MELI, IDCC, and WCC made it to the Zacks Rank #1 (Strong Buy) momentum stocks list on August 10, 2021

Top Ranked Momentum Stocks to Buy for August 10th

Wesco International, Inc. (WCC) CEO John Engel on Q2 2021 Results - Earnings Call Transcript

Shares of WESCO International (NYSE:WCC) were unchanged after the company reported Q2 results. Quarterly Results Earnings per share rose 153.85% over the past year to $2.64, which beat the estimate of $1.90.

WESCO International: Q2 Earnings Insights

PITTSBURGH--(BUSINESS WIRE)--WESCO International, Inc. (NYSE: WCC), a leading provider of business-to-business distribution, logistics services, and supply chain solutions, announces its results for the second quarter of 2021. John Engel, Chairman, President and CEO, said, “We had an exceptional quarter and delivered outstanding results across the board. Just one year after closing the transformational combination of WESCO and Anixter, the substantial value creation of the new WESCO is clear an

WESCO International, Inc. Reports Second Quarter 2021 Results

Wesco International (WCC) could be a great choice for investors looking to buy stocks that have gained strong momentum recently but are still trading at reasonable prices. It is one of the several stocks that made it through our 'Fast-Paced Momentum at a Bargain' screen.

Why Fast-paced Mover Wesco International (WCC) Is a Great Choice for Value Investors

Wesco International (WCC) possesses the right combination of the two key ingredients for a likely earnings beat in its upcoming report. Get prepared with the key expectations.

Wesco International (WCC) Reports Next Week: Wall Street Expects Earnings Growth

The Zacks Style Scores offers investors a way to easily find top-rated stocks based on their investing style. Here's why you should take advantage.

Wesco International (WCC) is a Top-Ranked Value Stock: Should You Buy?

Wesco International (WCC) possesses solid growth attributes, which could help it handily outperform the market.

3 Reasons Why Wesco International (WCC) Is a Great Growth Stock

PITTSBURGH--(BUSINESS WIRE)--WESCO International, Inc. (NYSE: WCC) will hold its second quarter 2021 earnings conference call on Thursday, August 5, at 10:00 a.m. EDT. Dial-in details are below. The live audio webcast and presentation slides of the earnings call will be accessible on the investor relations section of WESCO's website, www.wesco.com. The link to the webcast replays will be posted in the Events and Webcasts section of WESCO's Investor Relations website. WESCO will also be particip

WESCO Announces Second Quarter 2021 Earnings Call

Apple

Arrow Electronics

Avnet

Jabil

ON Semiconductor

Sensata Technologies Hld

Tokyo Electron Ltd

Vishay Intertechnology

The tech sector offers many stocks with fast-growing earnings at attractive valuations.

Tech Stocks Remain a Solid Option for Investors

COCONUT CREEK, Fla., June 30, 2021 /PRNewswire/ - One Exam Prep, a subsidiary of ProBility Media Corp, (OTCPK: PBYA) an education company building the first full-service training and career advancement brand for the skilled trades, online classes have seen a fivefold increase since the start of Covid-19.

One Exam Prep Experiences 500% Growth Year over Year in Virtual Class Attendance

AGCO

ArcBest

G-III Apparel Group

Urban Outfitters

These stocks have potential for both short-term profits and long-term gains.

6 Buy-and-Hold Stocks with Near-Term Upside Potential

WESCO International (WCC) has seen solid earnings estimate revision activity over the past month, and belongs to a strong industry as well.

Why You Shouldn't Bet Against WESCO International (WCC) Stock

PITTSBURGH--(BUSINESS WIRE)--WESCO Distribution, Inc., (NYSE: WCC) today announced that it will redeem all of its outstanding 5.375 percent Senior Notes due 2024. The $350 million aggregate principal amount of outstanding notes will be redeemed on July 2, 2021, at a redemption price equal to 101.344 percent of the principal amount of the Senior Notes, together with accrued and unpaid interest to the redemption date. WESCO intends to fund the redemption using cash and availability under its Rece

WESCO Announces Redemption of 5.375% Senior Notes Due 2024

WESCO International's preferred stock has appreciated significantly since it was issued almost a year ago.

News for WESCO Stock (WCC)