Is Industrial Company WESCO International, Inc. Set to Bounce Back?

Industrial supply company WESCO disappointed with its latest results, but it could be set to recover in due course.

Feb 11, 2014 at 1:13PM

The industrial sector's winter of discontent continued with industrial supply company WESCO (NYSE:WCC) managing to miss estimates in the fourth quarter. There is no doubt that weather has had a serious effect on the industrial sector, but anecdotal evidence suggests that long-cycle industrial orders are doing well. Meanwhile, companies exposed to short-cycle orders are seeing an inevitable slowdown. Is this creating a buying opportunity whereby growth will snap back rapidly? Moreover, which sectors are seeing growth?

WESCO misses estimates
Sales came in below internal expectations for the fourth quarter, and WESCO further disappointed the market by announcing that its January sales to date were down 4%. All of which must make Foolish investors wonder how the company is going to hit its guidance of flat to 3% growth in sales for the first quarter.

Clearly, the answer lies in your belief in whether the problem is weather related or a more systemic issue with industrial demand.

A brief summation of how WESCO disappointed in the fourth quarter:

  • Sales growth of 14.2% vs. internal estimates of 14%-15%
  • Gross Margins of 20.6% vs. internal estimates of 20.7%
  • Operating margin of 5.9% vs. internal estimates of 5.9%-6%
  • Earnings per share, or EPS, of $1.26 vs. analyst consensus of $1.31

Looking ahead to the full year for 2014, WESCO's management gave themselves a wide berth by forecasting 3%-6% in sales growth. Meanwhile, diluted EPS is expected to be in the $5.30-$5.70 range, implying growth of 5.6%-13.5%.  

WESCO under the weather
Its management can be excused for giving a wide range in its forecasts, because industrial supply companies tend to have limited visibility. In addition, the company's prospects are highly dependent on the changing trends in the industrial sector. Therefore, when short sales cycle companies like WESCO or Fastenal miss estimates it's probably more of a reflection of current conditions.

Indeed, the Institute for Supply Management, or ISM, data weakened noticeably in January. However, Foolish investors should note that companies exposed to longer cycle orders, like General Electric and Alcoa, have generally given better outlooks for 2014. All of which suggests that underlying conditions generally remain positive in the industrial sector, and the current weakness could prove temporary.

Key trends
As ever, the key is to try and discern which sub-sectors are likely to outperform for WESCO. The company generates sales from four segments. Here is the split for 2013:

Source: WESCO.

Management's commentary on its industrial sales was mixed. Sales were down 3.2% as "customers maintaining tight controls on their capital spending", according to WESCO's management on the conference call. However, there were pockets of strength in its latest results. In particular, automation and lighting remain areas of strength, while management expects better conditions in non-residential construction with low- to mid-single-digit growth estimated for 2014.

Rockwell, Acuity, and Hubbell will like WESCO's results
Indeed, investors in some of its key suppliers like automation company Rockwell (NYSE:ROK), lighting company Acuity Brands (NYSE:AYI), and electrical product manufacturer Hubbell (NYSE:HUB-B), will be pleased by the positive outlook given by WESCO's management. 

WESCO reported double-digit growth in its lighting (ex lamps) results and this bodes well for the future results of a partner-supplier like Acuity. This is particularly resonant for Acuity, because WESCO describes itself as a copy with "full lighting solution capability". In other words, it also sells the kind of LED lighting controls that Acuity hopes it will sell alongside its core lighting solutions. 

Rockwell and Hubbell are both key partner-suppliers of WESCO in the automation market, and WESCO's management affirmed its positive guidance on automation remained positive. This is good news for Rockwell and Hubbell. Moreover, its purchases of Hubbell's equipment were declared as being in line with Hubbell's sales. This means that WESCO shouldn't be carrying any excess inventory of Hubbell's products, so Hubbell should have some upside from sales (at least to WESCO) provided its end markets remain strong.

The bottom line
Admittedly, WESCO has a job to do to hit its first quarter guidance. However, if you think the bad weather had a major impact on industrial activity in the previous quarter (and January to boot) then the recent dip is a buying opportunity. A number of companies are expecting a better year for U.S. commercial construction, and should the industrial sector bounce back in the coming months, then WESCO is likely to see some upside too.

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Lee Samaha has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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