WESCO International’s (WCC - Analyst Report) fourth quarter 2013 earnings of $1.26 per share missed the Zacks Consensus Estimate of $1.32 by 6 cents.
WESCO reported revenues of $1.88 billion, down 2.7% sequentially but up 14.3% year over year. The year-over-year increase was attributable to the positive impact of acquisitions, partially offset by a reduction in organic sales and unfavorable currency movements (weaker Canadian to U.S. dollar conversion). Revenues, however, missed the Zacks Consensus Estimate of $1.90 billion.
End Market Update
WESCO is seeing signs of strength across end markets, with an expanding pipeline, higher bidding activity and growing backlog. The Utilities market remains the strongest.
WESCO stated that sales from the Industrial end market were down in the reported quarter mainly on account of non-repeating Industrial capital projects in the quarter, and customers maintaining tight controls on their capital spending. Channel inventories seemed to be in balance with current demand and the bid activity levels remained strong in the quarter.
The company is seeing a mixed Construction market. While still weak, the non-residential construction market in the U.S. and Canada is starting to show signs of improvement. Sales to construction customers remained flat in the quarter. The residential construction story remains positive, although WESCO’s limited exposure to the segment means that there will be no material impact on its results.
The Utilities business continues to see good growth, which management attributed to WESCO’s integrated supply model. The model is particularly helpful for utilities looking for efficiency and effectiveness in their supply chains. WESCO has steadily improved its offerings on the transmission side, which have seen it through the recession. However, the current strength is also attributable to new wins and an improving distribution business. Construction markets typically provide the impetus for greater spending by utilities, so stronger construction markets will further add to this strength.
Sales in the CIG market (schools, hospitals, property management firms, retailers, financial institutions, cable companies and governmental agencies) registered improvement of about 5.0% in the quarter. Sales growth was driven by broadband communications and improvements in commercial and institutional, partially offset by declines in government due to budget constraints and sequestration.
WESCO remains focused on providing a one-stop shop for its customer supply chain needs.
Gross profit was $376.2 million, or 20.0% of sales, compared with $337.3 million, or 20.5% of sales, in the year ago quarter. WESCO has maintained steady gross margins over the past few years owing to its integrated model and tight cost control.
Operating profit of $110.6 million was up 120.0% from the year-ago quarter. Operating margin of 5.9% expanded 280 bps from the year-ago quarter.
On a non-GAAP basis, WESCO’s net income was $67.0 million, up 22.7% from the year-ago quarter.
Cash balance at the end of the quarter was $123.7 million, compared with $98.6 million in the prior quarter. Trade accounts receivable were 1.05 billion compared with $1.04 in the prior quarter. Long term debt in the fourth quarter was $1.45 billion compared with $1.53 billion in the third quarter.
For the first quarter of 2014, WESCO expects year-over-year revenue increase of at least 0-3%. Gross margin is expected to be in the range of 20.8-21% while operating margin is expected to be in the range of 5.3-5.5%. The tax rate is expected to be in the 26-28% range.
For full year 2014, sales are expected to be up 3-6% on a consolidated basis. Gross margin is expected to be approximately 20.9%, while operating margin is expected in the range of 6.1-6.3%. The tax rate is likely to be around 26-28%. All this is expected to result in earnings per share of $5.30-$5.70 for the year.
WESCO’s business is currently being driven by strengthening end markets and its integrated supply model, which increase efficiencies for its customers. For the longer term, we continue to believe in WESCO’s solid strategies, strong operating model, market position and customer clout.
However, near-term results will continue to be impacted by economic activity, given the company’s exposure to core markets, such as industrial, utility, construction and government that should contain share price appreciation.
Currently, WESCO has a Zacks Rank #3 (Hold). Its closest peers are Avnet Inc (AVT - Analyst Report), Richardson Electronics Ltd and Arrow Electronics (ARW - Analyst Report).