BUSINESS
WESCO International, Inc. provides business-to-business distribution, logistics services, and supply chain solutions in the United States, Canada, and internationally. It operates through three segments: Electrical & Electronic Solutions (EES), Communications & Security Solutions (CSS), and Utility and Broadband Solutions (UBS). The EES segment supplies products and supply chain solutions, including electrical equipment and supplies, automation and connected devices, security, lighting, wire and cable, and safety, as well as maintenance, repair, and operating (MRO) products. This segment also offers contractor solutions, direct and indirect manufacturing supply chain optimization programs, lighting and renewables advisory services, and digital and automation solutions. The CSS segment operates in the network infrastructure and security markets.
INVESTMENT RATING
With future capital returns forecasted to be above the cost of capital, WCC is expected to continue to be an important Value Builder.
WESCO International has a current Value Trend Rating of B (Positive).
The Value Trend Rating reflects inconsistent signals from PTR’s two proprietary measures of a stock’s attractiveness. WESCO International has a neutral Power Rating of 51 but a good Appreciation Score of 78, with the Positive Value Trend Rating the result.
WESCO International’s stock is selling well below targeted value. The current stock price of $167.70 compares to targeted value 12 months forward of $391.
WESCO International’s high appreciation potential results in an appreciation score of 78 (only 22% of the universe has greater appreciation potential.)
WESCO International has a Power Rating of 51. (This neutral Power Rating indicates that WCC’s chances of enjoying favorable investment performance over the near to intermediate term are only average.)
Contributing to this neutral Power Rating: recent price action has been slightly favorable. Offsetting factors are the Electric Apparatus & Equipment – Wholesale comparison group is in a slightly weakened position currently; and WCC’s earnings estimates have fallen very significantly in recent months.
INVESTMENT PROFILE
WCC’s financial strength is average. Financial strength rating is 60.
Relative to the S&P 500 Composite, WESCO International Inc has neutral Growth/Value characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that WCC is higher risk. High historical growth is a positive for WCC. Relative weaknesses include: high stock price volatility, and high earnings variability. WCC’s valuation is low: moderate dividend yield, low P/E ratio, and low price/book ratio. WCC has unusually low market capitalization.
CURRENT SIGNALS
WESCO International’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; and falling leverage.
WESCO International’s current technical position is very weak. The stock price is in a 0.5 month down move. The stock has declined 20.0% from its prior high. The stock price is below its 200 day moving average which is in a downtrend. The stock has just risen above its 200 day moving average.
ALERTS
Marginal negative changes in WESCO International Inc (NYSE: WCC) fundamentals have recently occurred: significant quarterly earnings deceleration occurred.
The stock is currently rated B.
WESCO International Inc (NYSE: WCC) stock closed at $167.70 on 5/3/24 after an increase of 1.6%. Moreover, above average trading volume at 120% of normal accompanied the advance. The stock has risen 6.6% during the last week and has been strong relative to the market over the last nine months.
CASH FLOW
In 2023, WESCO International experienced no change in cash of -$3 million (-1%). Sources of cash balanced uses. Cash generated from 2023 EBITDA totaled +$1,660 million. Non-operating uses consumed -$99 million (-6% of EBITDA). Cash taxes consumed -$235 million (-14% of EBITDA). Re-investment in the business amounted to -$821 million (-49% of EBITDA). On a net basis, debt investors withdrew -$326 million (-20% of EBITDA) while equity investors pulled out -$183 million (-11% of EBITDA).
WESCO International’s Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Wesco International Peer Group. In most years, WESCO International was in the third quartile. Currently, WESCO International is substantially below median at -6% of EBITDA (-$99 million).
WESCO International’s Cash Taxes, %EBITDA enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Wesco International Peer Group. In most years, WESCO International was in the top quartile and second quartile. Currently, WESCO International is at the upper quartile at -14% of EBITDA (-$235 million).
WESCO International’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Wesco International Peer Group. In most years, WESCO International was in the top quartile and second quartile. Currently, WESCO International is slightly above median at -49% of EBITDA (-$821 million).
WESCO International’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Wesco International Peer Group. In most years, WESCO International was in the third quartile and top quartile. Currently, WESCO International is substantially below median at -20% of EBITDA (-$326 million).
WESCO International’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Wesco International Peer Group. In most years, WESCO International was in the third quartile and second quartile. Currently, WESCO International is slightly above median at -11% of EBITDA (-$183 million).
WESCO International’s Change in Cash, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Wesco International Peer Group. In most years, WESCO International was in the second quartile and third quartile. Currently, WESCO International is above median at -0% of EBITDA (-$3 million).
WESCO International’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Wesco International Peer Group as well. In most years, WESCO International was in the third quartile and lower quartile. Currently, WESCO International is slightly below median at +2%.
PROFITABILITY
WESCO International’s return on equity has improved very significantly since 2014. The current level of 13.7% is 1.16X the low for the period and is -3.9% from the high.
WESCO International’s small negative trend in pretax operating return significantly offset by a very strong positive trend in non-operating factors is a significant analytical factor.
The productivity of WESCO International’s assets declined over the full period 2014-2024: asset turnover has experienced a downtrend but it experienced a very sharp recovery after the 2020 low.
Partially offsetting this trend, however, pretax margin has exhibited a volatile overall uptrend although it experienced a very sharp decline after the 2022 high.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
WESCO International’s return on equity is slightly above median (13.7%) for the four quarters ended March, 2024.
Operating performance (pretax return on assets) is at median (5.8%) reflecting asset turnover that is at the lower quartile (1.43X) and above median pretax margin (4.0%).
Tax “keep” rate (income tax management) is at median (76.2%) resulting in after tax return on assets that is slightly below median.
Financial leverage (leverage) is above median (3.12X).
GROWTH RATES
There are no significant differences between WESCO International’s longer term growth and growth in recent years.
WESCO International’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.
Annual revenue growth has been 12.6% per year.
Total asset growth has been 15.0% per year.
Annual E.P.S. growth has been 14.3% per year. (More recently it has been 65.0%.)
Equity growth has been 9.5% per year.
WESCO International’s consensus growth rate forecast (average of Wall Street analysts) is 10.0% — below the average of the historical growth measures.
Relative to the Wesco International Peer Group, WESCO International’s historical growth measures are erratic. Total asset growth (15.0%) has been upper quartile. Revenue growth (12.6%) has been at the upper quartile. E.P.S. growth (14.3%) has been above median. Equity growth (9.5%) has been above median.
Consensus growth forecast (10.0%) is slightly below median.
PRICE HISTORY
Over the full time period, WESCO International’s stock price performance has been variable and below market. Between July, 2013 and May, 2024, WESCO International’s stock price rose +121%; relative to the market, this was a -27% loss. Significant price moves during the period: 1) March, 2020 – December, 2021: +476%; 2) December, 2019 – March, 2020: -62%; and 3) December, 2013 – January, 2016: -56%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of 7.1% is below median relative to the S&P 500 Composite.
In addition to being below median relative to S&P 500 Composite, current annual total return performance through April, 2024 of 7.1% is at the lower quartile relative to WESCO International Inc Peer Group.
Current 5-year total return performance of 22.0% is upper quartile relative to the S&P 500 Composite.
Through April, 2024, with upper quartile current 5-year total return of 22.0% relative to S&P 500 Composite, WESCO International’s total return performance is above median relative to WESCO International Inc Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, WCC’s overall valuation is quite low. Four of five factors are lower quartile. The highest factor is the ratio of enterprise value/assets, followed by the price/equity ratio, then by the price/earnings ratio, then by the ratio of enterprise value/earnings before interest and taxes. The lowest factor, ratio of enterprise value/revenue, is lower quartile.
Relative to WESCO International Peer Group, WCC’s overall valuation is normal. The highest factor, the ratio of enterprise value/revenue, is near the upper quartile. Ratio of enterprise value/assets is at median. Price/equity ratio is at median. Price/earnings ratio is at median. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is below median.
WESCO International has a major value gap compared to the median. For WCC to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 0.65X to 0.52X. If WCC’s ratio of enterprise value/revenue were to fall to 0.52X, its stock price would be lower by $-61 to $107.
For WCC to achieve upper quartile valuation relative to the WESCO International Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 0.65X to 0.68X. If WCC’s ratio of enterprise value/revenue were to rise to 0.68X, its stock price would increase by $13 from the current level of $168.
VALUE TARGETS
With future capital returns forecasted to be above the cost of capital, WCC is expected to continue to be an important Value Builder.
WESCO International’s current Price Target of $391 represents a +133% change from the current price of $167.70.
This high appreciation potential results in an appreciation score of 78 (only 22% of the universe has greater appreciation potential.)
With this high Appreciation Score of 78, the neutral Power Rating of 51 results in an Value Trend Rating of B.
WESCO International’s current Price Target is $391 (+3% from the 2023 Target of $381 and +133% from the 05/03/24 price of $167.70). This plateau in the Target is the result of a +15% increase in the equity base and a -11% decrease in the price/equity multiple. The forecasted decline in growth has a large negative impact on the price/equity multiple and the forecasted decline in return on equity has a large negative impact as well. Partially offsetting these Drivers, the forecasted decline in cost of equity has a very large positive impact.
PTR’s return on equity forecast is 15.5% — in line with our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2015 and 2023. The current forecast is well above the 2020 low of 8%.
PTR’s growth forecast is 13.0% — below our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2015 and 2023. The current forecast is significantly above the 2018 low of 0%.
PTR’s cost of equity forecast is 9.0% — in line with recent levels. Forecasted cost of equity suffered a dramatic, erratic increase between 2015 and 2023. The current forecast is above the 2017 low of 5.3%.
At WESCO International’s current price of $167.70, investors are placing a positive value of $6 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 19.0% per year, and a return on equity of 16.5% versus a cost of equity of 10.0%.
PTR’s 2025 Price Target of $391 is based on these forecasts and reflects an estimated value of existing assets of $176 and a value of future investments of $214.
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