Wesco International (NYSE:WCC) is an American provider of B2B distribution, logistics services, and supply chain solutions. Their operating segments break down into: Electrical & Electronic Solutions, Communications & Security Solutions, and Utility & Broadband Solutions. They operate around 800 branches in 50 countries, employing over 20,000 people worldwide. Revenue breaks down as follows:
The stock has been cyclical and volatile with a beta of 2.07, below is the share performance since IPO:
Below are the returns metrics versus peers:
Company Revenue 10-Year CAGR Median 10-Year ROE Median 10-Year ROIC EPS 10-Year CAGR FCF/Share 10-Year CAGR WCC 11.5% 11% 6.3% 9.9% 5.6% GWW 5.7% 36.6% 18.8% 12.5% 8.3% OTCPK:RXLSF 1.6% 3.8% 2.2% 10.6% 4.9% AVT 0.4% 10.6% 7.4% 9.9% n/a HDS* -1.9% 25.8% 2% n/a 40.6%
*acquired by Home Depot(HD) in 2020
The major news of recent history is the major acquisition of Anixter, completed in 2020 for $4.5 billion.
Capital Allocation
Let’s take a look at how capital was allocated, in USD millions:
Year 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 EBIT 466 374 331 319 352 346 347 802 1,438 1,406 FCF 231 261 282 128 261 180 487 12 -88 401 CAPEX 21 22 18 22 36 44 57 55 99 92 Acquisitions 139 152 51 28 3,708 187 Dividends 30 57 57 134 Repurchases 7 156 5 107 127 150 11 75 Debt Repayment 1,302 1,537 2,460 1,721 1,320 1,247 1,524 3,455 3,792 3,427 SBC 15 13 12 15 16 19 19 31 46 48
The big story here is the massive amounts of deleveraging that has already occurred. I don’t see much point in a dividend or share repurchases when debt levels are still so high. This is a case where I’d like to see a singular focus on paying down debt, but it’s not surprising to see some shareholder yield as well.
Share count has grown in spite of the repurchases, so this is clearly not a priority and shouldn’t be counted on as being one of the drivers of the stock price. So my main concern isn’t so much with the capital allocation, as is the decision to be so levered. More on this below.
Risk
I can’t say the debt levels are a real risk when they are indeed deleveraging so much. They have $984.1 million in cash versus $5.5 billion in long term debt. They can pay down debt to more comfortable levels.
In this situation, the main risk comes more from the price you as investor pay and capital allocation. The fundamental business risk is low, and it’s not the type of industry that is ripe for disruption. It does come with cyclicality, and it has been a very volatile stock. This is why price is so important, which brings us to valuation in just a bit.
I would put WCC into the “good” category as far as quality goes. I also don’t see the quality improving in any meaningful way. While the debt can be paid off over time, it sure was a lot of leverage to gain market share, but not necessarily make it a “better” business. Again, I don’t think this is a bad business, they’ve been profitable every year as a public company and did so through the dotcom crash, the GFC, and the pandemic. This shouldn’t go unnoticed.
With only 1.1% insider ownership, I wouldn’t call it a risk, but low insider ownership is a bit of a red flag for me. Especially considering the CEO has been at the helm since 2009. Only a minor issue though.
Earnings
Let's take a quick look at recent earnings:
I don’t have any specific call for the next quarter, other than I would be looking for some kind of drop after hitting a record high stock price this year.
Valuation
As just mentioned shares reached an all time high in February of this year, and are down almost 5% currently. Let’s look first at historical multiples, then compare current multiples with peers.
Company EV/Sales EV/EBITDA EV/FCF P/B Div Yield WCC 0.6 9.3 9.7 1.9 0.8% GWW 2.9 17.1 26.8 13.2 0.8% RXLSF 0.5 5.9 12.6 1.5 4.7% AVT 0.3 6 17.8 1 2.3%
The P/E ratio looks a bit low historically. Currently, the multiples don’t suggest any discount when comped to peers. So let's look at the DCF model below:
Earnings growth has no doubt been boosted by the acquisition, but I’m not bullish on earnings growth from this point. The acquisition was successful in increasing market share, but not necessarily increasing the quality of earnings. The amount of debt used to acquire a business that also falls into the “good” category is not the type of trade I like to see. The company is bigger because of the acquisition, but not better. So the combination of average to good business quality coupled with a price tag that isn’t undervalued to me leaves me to give a hold rating.
Furthermore, as someone who comes from a growth/quality at a reasonable price framework, I can’t put WCC onto a watch list of high quality companies simply because the quality is merely good, not great.
Conclusion
The market is fairly optimistic on this stock, as shown by the all time high share price earlier this year. The acquisition makes strategic sense, but the amount of debt used to make the purchase does give me some worry, although I don't consider it a major risk. The major risk comes from paying a high price for a good business that is about to plateau considerably.
The stock is a hold for me right now, and I also won’t be adding it to any sort of qualitative watch list for future opportunities.
Evin Rohrbaugh
I am an independent analyst and investor interested in investing at the intersection of value and growth. My method is a highly qualitative focus on mostly small caps, looking for both long term compounders as well as some special situations. On Twitter @GrowthyValue
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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