WESCO International, Inc.WCC reported second-quarter 2018 adjusted earnings of 1.22 per share, which came in line with the Zacks Consensus Estimate. The figure increased 19.6% on a year-over-year basis and 31.2% sequentially. Strong operating results and favorable foreign exchange rate drove year-over-year bottom-line growth.
Net sales of $2.104 billion surpassed the Zacks Consensus Estimate of $2.092 billion. The figure surged 10.2% on a year-over-year basis and 5.5% sequentially. Further, sales growth also came slightly ahead of management's guided range of 7-10%.
Year-over-year top-line growth was driven by strong end-market results and robust performance across the geographies. Additionally, growing contract wins in all the end markets during the reported quarter remains a positive.
Further, organic sales grew 9% from the prior-year quarter. The metric was up 8% in the United States and Canada, and 30% in international markets. Moreover, effective pricing positively impacted the results by 2%.
However, the share price of the company has dipped 3.91% on Aug 2 at the market close. This can primarily be attributed to lower guidance for sales growth in the third quarter.
Notably, shares of WESCO have returned 10.9% over a year, outperforming the industry 's rally of 4.2%.
Top-Line in Detail
WESCO operates in four organized end markets - Industrial, Construction, Utility and CIG end markets.
Industrial Market: The company witnessed 6% year-over-year growth in organic sales, driven by 5% sales improvement in the United States and 7% rise in Canada in local currency. Further, the company witnessed sales growth of 16% in the industrial international market. The company continued to gain traction in petrochemical, technology, metals and mining, food and beverage and aerospace sectors which drove the results in this market. Moreover, WESCO's strong supply chain solutions portfolio bolstered sales in this market.
Construction Market: Organic sales increased 8% year over year, with improvement of 8% and 9% witnessed in the United States and Canada, respectively, in local currency. This can be attributed to strong sales from the industrial and commercial contractors. Further, sales to non-residential construction customers continued to accelerate in the quarter. Additionally, backlog improved 2% sequentially and 10% year over year in the reported quarter. This is likely to act as a catalyst for the company throughout the year.
Utility Market: The company experienced year-over-year growth of 19% in sales in this market. This was driven by 22% improvement in the United States, partially offset by a decline of 2% in Canada in local currency. Strong performance in this market can be attributed to strengthening relationships with investor-owned utility, public power and utility contractor customers. Further, WESCO continued to gain from growing need for renewable energy.
CIG Market: WESCO recorded 9% year-over-year growth in organic sales in this market, driven by strong performance in Canada which recorded 14% growth in local currency. Moreover, sales growth in international market contributed significantly in the quarter. The upside was driven by strong momentum across technology customers with the company's robust supply chain solutions portfolio. Sales also gained from continuous growth in LED lighting solutions, fiber-to-the-X deployments, broadband build-outs as well physical and cyber security for critical infrastructure protection.
WESCO International, Inc. Price, Consensus and EPS Surprise
Gross margin was up 19% in the reported quarter, which contracted 20 basis points (bps) from the year-ago quarter and 10 bps on a sequential basis. This due to inclusion of labor costs into cost of sales and unfavorable business mix.
Selling, general and administrative expenses (SG&A), as percentage of revenues were 13.9%, contracted 70 bps sequentially and 10 bps on a year-over-year basis.
WESCO's operating profit came in $91.2 million, up 10.4% from the prior-year quarter and 24.6% from the last reported quarter.
However, operating margin was 4.3%, in line with the year-ago quarter but expanded 60 bps sequentially.
Balance Sheet & Cash Flow
As of Jun 30, 2018, cash & cash equivalents were $110.9 million compared with $123.9 million as of Mar 31, 2018. Long-term debt was $1.26 billion compared with $1.29 billion at the end of first-quarter 2018.
Additionally, WESCO generated $33.8 million in cash from operations, down from $53 million at the end of the first quarter.
Capital expenditures in the quarter under review were $8.7 million, up from $7.7 million in the previous quarter. Free cash flow was $25.1 million which was down from $45.3 million in the previous quarter.
For third-quarter 2018, WESCO expects sales growth in a range of 3-6%. The Zacks Consensus Estimate for sales is pegged at $2.10 billion.
The company also anticipates growth in operating margin to lie between 4.5% and 4.8%. Further, effective tax rate in the third quarter is projected at 21%.
For 2018, WESCO has revised sales growth guidance from the range of 5-8% to 6-9% from the previous year. The Zacks Consensus Estimate is pegged at $8.26 billion.
Moreover, the company has raised the lower end of the earnings guidance to $4.6 from $4.5 per share. Earnings growth is currently expected to lie between $4.6 and $5 per diluted share. The Zacks Consensus Estimate is pegged at $4.77 per share.
The company also expects to generate free cash flow which will account for 90% of the net income.
Zacks Rank and Stocks to Consider
WESCO currently carries a Zacks Rank #3 (Buy).
Some better-ranked stocks in the broader technology sector are Adobe Systems ADBE , Verint Systems VRNT and Micron Technology MU . All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.
Long-term earnings growth rate for Adobe Systems, Verint and Micron is pegged at 16.2%, 10% and 8.18%, respectively.
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