A month has gone by since the last earnings report for Wesco International (WCC - Free Report) . Shares have lost about 12.9% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Wesco International due for a breakout? 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 Q1 Earnings & Revenues Miss Estimates
WESCO International reported first-quarter 2019 earnings of 93 cents per share, missing the Zacks Consensus Estimate by 2 cents. The figure was in line with the year-ago quarter’s figure.
Net sales of $1.96 billion lagged the Zacks Consensus Estimate of $1.99 billion. Further, the figure decreased 1.6% on a year-over-year basis.
This can primarily be attributed to shipment slowdown in January and February on account of seasonal events. Further, several branch closure, workday impact and currency headwinds continued to weigh on the stock throughout the quarter.
Nevertheless, the company’s sales gained momentum in March and the trend sustained in April as well.
Notably, organic sales in the reported quarter grew 1% from the prior-year quarter. Favorable pricing and robust growth in Canada and other international markets drove year-over-year sales growth.
Further, WESCO remains confident on its acquisition strength. During the reported quarter, it completed the buyout of OSRAM’s Sylvania Lighting Solutions which is likely to drive sales in the lighting market in the near term.
Top Line in Detail
WESCO operates in four organized end markets, namely Industrial, Construction, Utility and CIG.
Industrial Market: Organic sales in this market were down 0.3% from the year-ago quarter, reflecting flat sales in the United States and Canada in local currency. Sales from this market accounted for 36% of total sales. WESCO noted that growth in verticals like food processing, petrochemical and metals and mining was offset by contraction in OEM customer base.
Nevertheless, strengthening industry supply opportunities and bidding activity levels acted as tailwinds for WESCO during the first quarter. Moreover, rising capital spending by customers along with increasing production and capacity utilization continued to act as catalysts.
Construction Market: Organic sales increased 2.4% year over year, with 8% growth in Canada in local currency. However, U.S. sales were down 1% year over year in the first quarter. Sales from this market accounted for 33% of total sales. The company’s growing momentum across construction contractors and customers drove the top line in this market. Additionally, strong backlog remained positive for the company.
Utility Market: Sales from this market contributed 16% to WESCO sales. The company experienced year-over-year sales decline of 0.4% in this market. This was owing to 38% decline in Canada sales which offset 3% rise in U.S. sales in local currency during the reported quarter. Canada decline can be attributed to non-renewal of a contract.
Nevertheless, continued traction among investor owned utility, public power and generation customers remained positive throughout the quarter. Further, growing construction market and rising demand for renewable energy continued to be tailwinds.
CIG Market: The company recorded year-over-year improvement of 2.2% in organic sales in this market, driven by strong performance in Canada (22% growth in local currency). However, sales were down 5% in the United States due to decreasing number of end-user technology customers.
The upside in CIG sales was driven by growing adoption of supply chain solutions in cloud, data centre and broadband projects. Further, strong growth in LED lighting solutions, fiber-to-the-X deployments and broadband build-outs drove sales.
Gross margin was up 19.5% in the reported quarter, expanding 40 bps from the year-ago quarter.
Selling, general and administrative expenses (SG&A), as a percentage of revenues, were 15.1%, expanding 50 bps on a year-over-year basis.
Consequently, WESCO’s operating margin came in at 3.6%, contracting 10 bps from the prior-year quarter.
Balance Sheet & Cash Flow
As of Mar 31, 2019, cash & cash equivalents were $106.1 million, up from $96.3 million as of Dec 31, 2018. Long-term debt in the first-quarter 2019 was $1.21 billion compared with $1.17 billion at the end of fourth-quarter 2018.
Additionally, WESCO generated $28.9 million in cash from operations in the reported quarter, down from $122.2 million at the end of the fourth quarter.
Free cash flow in the quarter was $18.1 million, up from $109.7 million in previous quarter.
For second-quarter 2019, WESCO expects sales growth in the range of 3% to 6%.
Operating margin is expected to be in the range of 4.5-4.8%. Effective tax rate is projected at 23% for the second quarter.
For 2019, WESCO expects sales growth in the range of 3-6%. Currency headwinds are expected to offset benefits from SLS buyout.
Earnings are anticipated to be in the range of $5.10-$5.70 per share. Operating margin is expected between 4.3-4.7% for 2019.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
Currently, Wesco International has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, Wesco International has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.