It has been about a month since the last earnings report for WESCO International, Inc. (WCC - Free Report) . Shares have added about 1.7% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is WCC due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
WESCO International reported first-quarter 2018 adjusted earnings of 93 cents per share, which surpassed the Zacks Consensus Estimate by 5 cents. The figure increased 22.4% on a year-over-year basis but declined 9.7% sequentially. The year-over-year bottom line growth was aided by strong operating results and lowered tax rates.
Net sales of $1.994 billion surpassed the Zacks Consensus Estimate of $1.920 billion. The figure surged 12.4% on a year-over-year basis but dipped 0.1% sequentially. Further, the sales growth came well ahead of the management’s guided range of 6-9%.
The year-over-year top-line growth was driven by strong end-market results, robust performance in certain geographies and favorable foreign exchange rates which contributed 1.6% to the net sales.
Also, organic sales grew 10.6% from the prior-year quarter. The metric was up 10% in the United States and Canada and 24% in international markets. Moreover, effective pricing positively impacted the results by 2%.
Top-Line in Detail
WESCO operates in four organized end markets — Industrial, Construction, Utility and CIG end markets.
Industrial Market: The company witnessed 14% year-over-year growth in organic sales, which was driven by 9% sales improvement in the United States and 17% rise in Canada in local currency. Organic growth was driven by robust sales in metals and mining, food processing, OEM and other verticals. Moreover, WESCO’s strong supply chain solutions portfolio boosted sales in both the countries.
Construction Market: Organic sales increased 9% year over year, with 10% growth in the United States and Canada in local currency. This was attributed to higher sales to non-residential construction and contractor customers. Also, sales to industrial and commercial contractors continued to increase in the quarter. Additionally, backlog improved 4% sequentially and 14% year over year in the reported quarter which remains positive for the company throughout the year.
Utility Market: The company experienced 18% year-over-year growth in organic sales in this market which was driven by 21% improvement in the United States, partially offsetting a decline of 6% in Canada in local currency. Strong performance in this market was attributed to strengthening relationships with investor-owned utility and public power customers. Further, WESCO’s focus toward storm and wildlife recovery remained positive for growth opportunities in this quarter.
CIG Market: WESCO recorded 9% year-over-year growth in organic sales in this market, which was driven by 3% improvement in the United States and 5% in Canada in local currency. Moreover, sales growth in international market contributed to the company’s supply chain solutions in the quarter. The upside was driven by strength across technology customers that include data centers, broadband and cloud technology projects. Sales also gained from continuous growth in LED lighting solutions, fiber-to-the-X deployments, broadband build-outs as well as fiber in physical security for critical infrastructure protection.
Gross margin was up 19.1% in the reported quarter, which contracted 60 basis points (bps) from the year-ago quarter and 10 bps on a sequential basis.
WESCO’s operating profit came in $73.2 million, which was up from $66.6 million in the prior-year quarter but down from $81.4 million in the last reported quarter. However, operating margin was up 3.7%, which contracted down 10 bps year over year and 40 bps sequentially.
The year-over-year contraction of margins was due to rise in cost of goods sold as a percentage of revenues which came in 80.9%. The figure expanded 10 bps sequentially and 60 bps on a year-over-year basis. This was due to increased sales in international capital projects and classification of labor costs.
Selling, general and administrative expenses (SG&A), as percentage of revenues were 14.6%, which expanded increased 30 bps sequentially but declined 50 bps on a year-over-year basis.
Balance Sheet & Cash Flow
As of Mar 31, 2018, cash & cash equivalents were $123.9 million compared with $118 million as of Dec 31, 2017. Long-term debt was $1.29 billion compared with $1.31 billion at the end of fourth-quarter 2017.
Additionally, WESCO generated $53 million in cash from operations, down from $68 million at the end of the third quarter.
Capital expenditures in the quarter under review were $7.7 million up from $5.5 million in the previous quarter. Free cash flow was $45.3 million which was down from $62.5 million in the last reported quarter.
For second-quarter, 2018, WESCO expects sales growth in a range of 7-10%. The Zacks Consensus Estimate for sales is pegged at $2.04 billion.
The Zacks Consensus Estimate for earnings is pegged at $1.23 per share in the second quarter.
The company also anticipates growth in operating margin to lie between 4.2% and 4.5%. Also, effective tax rate in the second quarter is projected at 21%.
For 2018, WESCO anticipates sales growth in the range of 5-8% and earnings between $4.5 and $5 per diluted share. The company also expects to generate free cash flow which will account for 90% of the net income.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. There have been four revisions higher for the current quarter compared to three lower.
At this time, WCC has a nice Growth Score of B, though it is lagging a bit on the momentum front with a C. The stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our scores, the stock is primarily suitable for value investors while also being suitable for those looking for growth and to a lesser degree momentum.
Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. Notably, WCC has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.