4. WESCO International, Inc. (NYSE:WCC)
Forward PE as of June 24: 10.6x
Number of Hedge Fund Holders: 50
WESCO International, Inc. (NYSE:WCC) offers business-to-business distribution, logistics services, and supply chain solutions and operates through Electrical & Electronic Solutions, Communications & Security Solutions, and Utility and Broadband Solutions segments.
WESCO’s focus on strengthening its balance sheet and cash flow are some of its key growth catalysts. The company made significant strides in reducing its net debt by improving its financial leverage to 2.6x EBITDA, which is close to its target range of 1.5 to 2.5 times. Over the twelve months ending March 31, 2024, the company generated over $1.4 billion in free cash flow and showed its ability to convert net income into cash flow effectively. Despite supply chain disruptions in recent years, WESCO’s strategic investments in working capital have begun to normalize and are contributing to its strong cash flow performance.
Moreover, WESCO has raised its full-year free cash flow outlook to between $800 million and $1 billion, surpassing 100% of adjusted net income at the midpoint. This increased cash flow guidance provides the company the flexibility for further share repurchases, debt reduction, or even strategic mergers and acquisitions.
In the first quarter of 2024, WESCO experienced margin pressures due to reduced supplier volume rebates and unfavorable inventory adjustments. However, the recent decline in its stock price has made the company’s valuations significantly favorable, compared to its peers. WESCO is trading at a forward PE of 10.6x as of June 24 compared to its peer average of 20x and the current industry average of 24.5x. In conclusion, despite the pressures faced by the company, it could experience some significant growth catalysts over the longer term and its current valuation could provide an entry point to new investors.
In the first quarter, 50 hedge funds held positions in the stock worth $2.12 billion. As of Q1, Leonard Green & Partners is the top investor in the company and has a position worth $1.1 billion.
Diamond Hill Capital stated the following regarding WESCO International, Inc. (NYSE:WCC) in its first quarter 2024 investor letter:
“Among our bottom individual contributors in Q1 were WESCO International, Inc. (NYSE:WCC) and Extra Space Storage. Leading industrial distributor WESCO (WCC) has experienced choppier results as the initial benefits from its Anixter merger have moderated and a cyclical showdown has highlighted some execution missteps. However, we believe that over the long term, WCC can leverage its significant scale to take market share and improve margins. The company is also well-positioned to benefit from several secular tailwinds, including electrification and re-shoring, among others.”
