WESCO International’s WCC first quarter 2015 adjusted earnings of 90 cents per share missed the Zacks Consensus Estimate by a good 11 cents. Earnings decreased 35.9% sequentially and 7.8% on a year over year basis. The sequential decrease was due to lower operating profit.
Revenues
WESCO reported revenues of $1.81 billion, down 9% sequentially but up 0.3% year over year. The year-over-year increase in revenues was attributable to the positive impact of acquisitions, offset by an adverse foreign exchange impact and fewer workdays. Revenues however missed the Zacks Consensus Estimate of $1.90 billion. Organic sales were up 3.2%.
End Market Update
WESCO is seeing signs of strength across end markets, with an expanding pipeline, and higher bidding activity generating increasing contract wins. The Utilities market remains the strongest.
WESCO stated that sales from the Industrial end market were down 8% sequentially and 5.7% from the prior year quarter because of the impact of harsh weather conditions, logistics, U.S. dollar and oil prices on manufacturing sector.
The company is seeing signs of growth in the Construction market, where year over year sales were up 2.3% but down 14.3% sequentially. Backlog increased 5% sequentially during the quarter and was flat on a year over year basis. The year-over- year rise was driven by 8% growth in construction sales both in the U.S. and Canada. This growth reflects that leading indicators in the non-residential construction market are improving despite an expected reduction in oil and gas spending.
The Utilities business continues to see good growth, attributable to new wins and an improving distribution business with existing utility customers. Sales in this segment grew 4.9% this quarter versus the previous year. This marks the 16th consecutive quarter of year-over-year sales growth for this segment. The company saw new customer wins and growing business at existing customers during the quarter. It also won a multiyear integrated supply contract with an investor owned utility customer for providing supply chain management, logistics, and inventory handling services for a high-voltage transmission project during the quarter.
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 2.7%, making it the seventh consecutive quarter of year-over-year sales growth.
Margins
Gross profit was $367.7 million, or 20.2% of sales, compared with $402.2, or 20.2% of sales, in the prior quarter and $374.8 million, or 20.7% of sales, in the first quarter of 2014. Gross margin was up 9 basis points (bps) from the prior quarter but down 45 bps from the year-ago quarter.
Operating profit of $87.2 million (or 4.8% of sales) was lower than $124.2 million (6.2%) in the previous quarter and $93.0 million (5.1%) in the year-ago quarter. Operating profit was mitigated by effective cost controls.
WESCO’s net income was $46.6 million (or a net margin of 2.6%), down from $73.7 million (3.7%) in the previous quarter and $51.9 (2.9%) in the year-ago quarter.
Balance Sheet
Cash and cash equivalents at the end of the quarter was $154.4 million compared with $128.3 million in the prior quarter. Long-term debt in the first quarter was $1.37 billion, flat sequentially. The company repurchased approximately 300,000 shares of stock during the quarter.
Guidance
Management did not provide guidance for the second quarter.
For the full year, management revised its guidance. Sales are expected to increase in the range of (3%) to 3% (previous 0%-3%). Earnings per share are expected to be in the range of $5.00 to $5.40 for the year (previous 5.20 to $5.60)
Conclusion
WESCO reported weak first-quarter results with both the top and bottom lines missing the Zacks Consensus Estimate.
But it is encouraging to note that sales in the reported quarter were aided by acquisitions as well as organic growth. 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.
Acquisitions will remain an important part of its growth strategy and 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. Additionally, its cost streamlining initiative will likely boost margins going forward.
Improving macroeconomic conditions in the U.S. and Canada will further drive the company’s performance. However, foreign exchange and oil prices are expected to remain a headwind.
Currently, WESCO has a Zacks Rank #4 (Sell). Some better-ranked stocks in the technology sector include Angie's List, Inc. ANGI, Broadcom Corp. BRCM and Cognex Corporation CGNX. All these stocks sport a Zacks Rank #1 (Strong Buy).
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