WESCO International, Inc.’s WCC fourth quarter 2016 adjusted earnings per share (EPS) of 96 cents beat the Zacks Consensus Estimate by 2.1% or 2 cents. However, earnings decreased 9.4% sequentially and 7.3% year over year.
Over the last one year, the stock has outperformed the Zacks Electronics - Parts Distribution industry. It gained 84.63% compared with the industry’s gain of 39.70%.
Revenues of $1.79 billion missed the Zacks Consensus Estimate of $1.8 billion by a slight margin.
Sales were low on a year-over-year basis as a result of a weak construction market in the U.S. and Canada, and foreign exchange headwinds. However, the impact of lower sales on earnings was mitigated to a certain extent by the One WESCO strategy.
In the quarter, WESCO continued with its focus on supply chain process enhancements, cost reduction and supplier consolidations that are helping customers. The company has a comprehensive portfolio of products and services, and a sizable global footprint, which will help drive growth, going forward.
The quarterly numbers in detail:
Revenues
WESCO reported revenues of $1.79 billion, down 3.3% sequentially and 3.7% year over year.
Organic sales were down 7% attributable mainly to decreased pricing and foreign currency headwinds.
Acquisitions offset the decline in the core business, contributing 3% to the top line. Foreign exchange had a 1% negative impact on revenues.
End Market Update
Industrial End Market: WESCO stated that sales from the Industrial end market were down 7% year over year. U.S. industrial production capacity utilization stayed flat, making customers defer capital spending. Local currency sales were down 5% in the U.S. and 14% in Canada.
Construction End Market: The Construction market was down 2% year over year with U.S. down 3% and Canada staying flat on a local currency basis. Sales decline with industrial oriented contractors in the U.S. was partially offset by sales growth with commercial contractors.
Outside the industrial and construction markets, the company remains modestly positive about the non-residential construction market.
Utility End Market: Sales to the Utilities market were up 3% with the U.S. declining 2% and Canada down 5% in local currency. Sales to all customer groups - investor-owned utilities utility contractors and public power customers - were up. WESCO has witnessed sales growth for five years consecutively from value creation and scope expansion with utility customers. Last quarter, the company received a multiyear contract from its large publicly owned utility to provide power delivery and generation materials.
CIG End Market: Sales to the CIG market were down 6% year over year. The U.S. declined 10% while Canada was up 17% in local currency. During the quarter, solid growth in broadband partially made up for election related decline in government spending.
WESCO sees growth opportunities in data center construction; retrofits cloud technology projects as well as cyber and physical security for critical infrastructure protection.
WESCO International, Inc. Price, Consensus and EPS Surprise
WESCO International, Inc. Price, Consensus and EPS Surprise | WESCO International, Inc. Quote
Margins
Gross profit was $348.6 million, or 19.4% of sales. Gross margin was down 24 basis points (bps) sequentially and 9 bps from last year. The decline was mainly due to lower-than-expected revenues and unfavorable mix.
Operating expenses of $266.5 million were down 2.2% sequentially and 2.6% from the last year. However, both selling, general and administrative and depreciation and amortization expenses increased sequentially as a percentage of sales.
Operating profit of $82.1 million (or 4.6% of sales) was down 41 bps sequentially and 26 bps from a year ago.
Balance Sheet
Cash and cash equivalents at the end of the fourth quarter was $110.1 million compared with $112.8 million at the end of the third quarter. Long-term debt was $1.36 billion compared with $1.42 billion in the third quarter.
The company generated $217.2 million in cash from operations. spending $13.2 million on capex.
Free cash flow stayed strong and surpassed 150% of net income.
Guidance
The company expects first quarter sales to be flat to down 3%. Operating margin is expected within 3.8% to 4.1%.
For 2017, the company expects sales to be flat to up 4% while EPS is expected in a range of $3.60 to $4. The company targets increasing its free cash flow to at least 90% of net income.
Zacks Rank
Currently, WESCO has a Zacks Rank #3 (Hold).
Better-ranked stocks in the broader technology sector include NVIDIA Corporation NVDA, Linear Technology Corporation LLTC and Intersil Corporation ISIL, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
For the current year, the estimates for NVIDIA stayed unchanged while the same for Intersil and Linear Technology went up 1.75% and 1.83%, respectively in the past 60 days.
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