) first quarter 2014 earnings of 97 cents per share missed the
Zacks Consensus Estimate by 11 cents. Lower sales volumes in
Canada and a weaker Canadian currency led to the dismal bottom
WESCO reported revenues of $1.81 billion, down 3..7% sequentially
but up 0.2% year over year. The year-over-year increase was
attributable to the positive impact of acquisitions, better
pricing and organic sales growth, partially offset by harsh
weather conditions, which deferred the weather-related projects,
and an adverse foreign exchange impact. Revenues, however, missed
the Zacks Consensus Estimate of $1.83 billion.
End Market Update
WESCO is seeing signs of strength across end markets, with an
expanding pipeline, higher bidding activity and growing backlog.
The Utilities market remains the strongest. However, the
Construction market experienced declines in sales due to adverse
WESCO stated that sales from the
end market were up in the reported quarter due to strengthening
at original equipment manufacturers (OEM) and heavy
manufacturing-oriented customers. Also, bid activity levels in
the quarter were the highest in the past 5 years. Moreover, since
channel inventories remain lean, the recent buildup activity is a
positive, indicating future growth.
The company is seeing a mixed
market. Sales were negatively impacted in the U.S. and Canada due
to a harsh winter, which delayed projects. While still weak, the
non-residential construction market in the U.S. and Canada is
starting to show improvement; with signs of escalating
construction activity in the U.S.
In Canada, the story is also positive, with the grouping of
EECOL and WESCO. Moreover, the market is expected to get better
after the spring defrost, which marks the beginning of the
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business continues to see good growth, attributable to WESCO's
integrated supply model. The model is particularly helpful for
utilities looking for efficiency and effectiveness in their
supply chains. WESCO has steadily improved its offerings on the
transmission side, which have seen it through the recession.
However, the current strength is also attributable to new wins
and an improving distribution business with existing utility
customers. Construction markets typically provide the impetus for
greater spending by utilities, so stronger construction markets
will further add to this strength.
Sales in the
market (commercial, institutional and government customers like
schools, hospitals, property management firms, retailers,
financial institutions, cable companies and governmental
agencies) also grew. Commercial and institutional business was
particularly strong, but government also improved.
Gross profit was $374.8 million, or 20.7% of sales, compared with
$381.1 million, or 21.1% of sales, in the year-ago quarter. The
gross margin declined primarily due to the lower-than-anticipated
sales in Canada, which generate higher margins.
Operating profit of $93.0 million was down 32.1% from the
year-ago quarter. Operating margin of 5.1% contacted 243 basis
points (bps) from the year-ago quarter.
WESCO's net income was $51.9 million, down 38.3% from the
Cash balance at the end of the quarter was $96.4 million compared
with $123.7 million in the prior quarter. Long-term debt in the
first quarter was $1.46 billion compared with $1.45 billion in
the previous quarter.
For the second quarter of 2014, WESCO expects year-over-year
revenue increase of at least 5-8%. Gross margin is expected to be
in the range of 20.6-20.8% while operating margin is expected to
be in the range of 5.7-6.1%. The tax rate is expected to be
For full year 2014, sales are expected to be up 3-6% on a
consolidated basis. Gross margin is expected to be approximately
20.9%, while operating margin is expected in the range of
6.1-6.3%. All this is expected to result in earnings per share of
$5.30-$5.70 for the year. Free cash flow is expected to be
approximately 80% of net income.
WESCO's business is currently being driven by strengthening end
markets and its integrated supply model, which increase
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.
However, near-term results will continue to be impacted by
economic activity, given the company's exposure to core markets,
such as industrial, utility, construction and government that
should contain share price appreciation. Moreover, the existing
currency rate situation and foreign exchange is anticipated to
negatively impact year-over-year sales.
Currently, WESCO has a Zacks Rank #3 (Hold). Some better-ranked
stocks in the technology sector include
Interxion Holding NV
), both with a Zacks Rank #1 (Strong Buy) and
) with a Zacks Rank #2 (Buy).