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WESCO International’s (WCC - Analyst Report) second quarter 2014 earnings of $1.29 cents per share missed the Zacks Consensus Estimate by 4 cents. However, earnings increased 32.5% sequentially and 3.0% on a year-over-year basis. Improved sales volumes in Canada, acquisition pipeline, organic sales growth and better pricing led to the increase in bottom line performance.
 
Revenues


WESCO reported revenues of $2.0 billion, up 10.7% sequentially and 5.9% year over year. The increase in revenues was attributable to the positive impact of acquisitions, solid sales execution and organic sales growth, and better weather conditions, partially offset by an adverse foreign exchange impact. Revenues however missed the Zacks Consensus Estimate by a slight margin.

Organic sales were up 6.0% year over year. Organic sales growth was attributable to both improving markets and improved weather conditions in the U.S. and in Canada.

Moreover, the company experienced growth across all geographies and across all its end markets and product portfolios. The One WESCO initiative helped the company drive sales execution and post above-market sales results. The strategy, which seeks to meet its clients’ global MRO, OEM, and Capital Project needs, received positive customer response.

End Market Update

WESCO is seeing signs of strength across end markets, with an expanding pipeline, higher bidding activity and growing backlog. The growing backlog indicates an improving U.S. economy and non-residential construction market. Contract wins during the quarter also reflect strength across its end markets. The Utilities market remains the strongest.

WESCO stated that sales from the Industrial end market were up in the reported quarter due to strengthening at original equipment manufacturers (OEM) and oil and gas customers. Also, bid activity levels in the quarter exceeded the first quarter levels (which were the highest in the past 5 years). Moreover, management said that channel inventories were in line with demand trends because of customer inventory controls. Therefore, the growth in the last quarter indicates that the company is shipping to consumption.

The company also won a new multiyear electrical MRO contract with a global oil and gas company for their downstream operations (while under the earlier contract with this customer WESCO only had the responsibility for their upstream operations). This significant win indicates the growth potential that would exist when the company will be successful in realizing its One WESCO strategy.

The company is seeing signs of growth in the Construction market. Last quarter, sales were negatively impacted in the U.S. and Canada due to a harsh winter, which delayed projects. With improved weather conditions, the end market is witnessing clear signs of strength primarily driven by growth in the U.S and Canada.

In Canada, the story is also positive, with the grouping of EECOL and WESCO. During the quarter, the company won an electrical distribution products contract for a large Canadian hospital. The contract win opens up opportunities for the company to expand its product portfolio going forward. The solid backlog offers support for the current construction season.
 
The Utilities business continues to see good growth, attributable to new wins and an improving distribution business with existing utility customers. The company won a material management and delivery contract with a utility contractor for a large transmission line project, expanding the company’s ability to efficiently provide solutions across the entire utility power supply chain.

Sales in the CIG market (commercial, institutional and government customers like schools, hospitals, property management firms, retailers, financial institutions, cable companies and governmental agencies) also grew. The One WESCO initiative for CIG customers helped sales in the market.

Margins

Gross profit was $411.8 million, or 20.5% of sales, compared with $392.6 million, or 20.7% of sales, in the year-ago quarter. Gross margin declined 16 bps from the previous quarter and 19 bps from the year-ago quarter. The sequential decline was primarily due to strength in the lower-margin Construction and Data Communication products and markets. The year-over-year decline was also mix-related.

Operating profit of $115.9 million was up 24.6% from the previous quarter and 5.5% from the year-ago quarter. Operating margin of 5.8% shrank 2 basis points (bps) from the year-ago quarter.
 

WESCO’s net income was $68.9 million, up 32.8% sequentially and 5.5% from the year-ago quarter.

Balance Sheet

Cash balance at the end of the quarter was $101.6 million compared with $96.4 million in the prior quarter. Long-term debt in the second quarter was $1.52 billion compared with $1.46 billion in the previous quarter.

Guidance

For the third quarter of 2014, WESCO expects year-over-year revenue increase of at least 5-7%. Gross margin is expected to be approximately 20.6% while operating margin is expected to be in the range of 6.3-6.5%. The tax rate is expected to be roughly 28%.

For full year 2014, sales are expected to be up 4-5% on a consolidated basis. Gross margin is expected to be approximately 20.6%, while operating margin is expected to be roughly 6%. All this is expected to result in earnings per share of $5.20-$5.40 for the year. Free cash flow is expected to be approximately 80% of net income. The effective tax rate is expected to be around 28%

Conclusion

WESCO reported disappointing second quarter results with both the top line and bottom line missing the Zacks Consensus Estimate. However, both revenues and earnings increased sequentially and year over year.
 
It is also encouraging to note that although acquisitions helped sales in the last quarter, revenue also grew on an organic basis. WESCO’s business is currently being driven by strengthening end markets and its One WESCO value proposition, which increases 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.

Moreover acquisitions will remain an important part of its growth strategy. The acquisition strategy will boost both top and bottom line performances in the near term. Moreover, it will augment its existing product lines and extend its worldwide footprint, thereby improving its overall market position.

Improving macroeconomic conditions in the U.S. and Canada will further drive the company’s performance. However, the foreign exchange is expected to remain a negative.

Currently, WESCO has a Zacks Rank #3 (Hold). Some better-ranked stocks in the technology sector include Charter Communications, Inc. (CHTR - Analyst Report), Interxion First Solar, Inc. (FSLR - Analyst Report) and Silicon Motion Technology Corp. (SIMO - Snapshot Report), all sporting a Zacks Rank #1 (Strong Buy).

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