Please ensure Javascript is enabled for purposes of website accessibility

WESCO International's Management Remains Bullish

By Lee Samaha - Nov 2, 2018 at 12:36PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The industrial supply company finally saw margin turn positive in the third quarter -- and gave a positive sales outlook for next year, too.

It's hard to describe WESCO International's (WCC -1.19%) earnings as anything more than satisfactory, but with a market busy fretting about an industrial slowdown, that just might be good enough. The industrial supply company's 2018 has been characterized by good sales growth accompanied by margin contraction, but the third quarter finally saw some progress on the matter. Let's take a closer look.

WESCO International third-quarter earnings: The raw numbers

Starting with the headline numbers from the quarter:

  • Net sales increased 3.4% to $2.1 billion compared with guidance for an increase of 3% to 6%.
  • Gross margin increased to 19.2% from 19.1% in the same period last year.
  • Operating profit margin improved to 4.7% from 4.4% in last year's third quarter, and came in at the upper end of guidance for 4.5% to 4.8%.
  • Operating profit increased 10% to $98 million.

As you can see above, WESCO operates on very slim margins, so a small movement in operating profit margin can make a big difference to its earnings. Expanding margins (gross and operating) have been a problem for WESCO in 2018, and the current quarter represents a positive development.

A chart showing an uptrend.

Image source: Getty Images.

Margin expansion

CEO John Engel lauded the success of the company's "value selling and margin improvement initiatives," and operating margin did indeed increase on a year-over-year and sequential basis. But it's worth noting that operating margin was 5% in the third quarter two years ago, versus 4.7% in Q3 2018.

The margin performance in 2018 is all the more disappointing because sales have generally come in ahead of expectations this year. For example, WESCO started the year with management predicting 3% to 6% sales growth for the full year, but current guidance is calling for an increase of 6% to 8%. However, the midpoint of current earnings-per-share guidance of $4.70 to $4.90 is only 3% above the midpoint of the $4.40-to-$4.90 range given at the start of the year.

Sales performance and guidance

The chart below breaks out WESCO's organic sales growth by segment. Although it shows a broad-based slowdown in growth in the quarter, it's important to note that the figures come up against a difficult comparison from the third quarter of 2017 -- the initial quarter that WESCO's sales significantly turned up following the U.S. industrial recession of 2015-2016.

Engel said that construction was the only end market that performed slightly weaker than expected. The culprit was the U.S. construction market (Canada grew strongly, according to management), but Engel declared himself disappointed with WESCO's performance and cited labor shortages as a reason for contractors not fulfilling their backlog.

WESCO sales growth.

Data source: WESCO International presentations. CIG = commercial, institutional, government. 

In fact, the natural slowdown in sales growth is implied in the company's sales guidance for the fourth quarter, for which management forecasts just 1% to 4% sales growth.

Turning to 2019, Engel believes WESCO can outperform its end markets. The company's forecast is for 2% to 5% growth in end markets with WESCO growing sales 1% to 2% ahead, resulting in full-year sales growth of 3% to 6% in 2019.

Looking ahead

Management's forecast for 2019 looks positive enough, and if the tide has truly turned with regard to margin expansion, then investors can expect a good year of profit growth. Provided the economy holds up and Engel's optimism is justified, then WESCO looks set for another good year.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

WESCO International, Inc. Stock Quote
WESCO International, Inc.
$105.83 (-1.19%) $-1.27

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.