Wesco International Inc.’s analysis versus peers uses the following peer-set: W.W. Grainger, Inc. (NYSE:GWW), Avnet, Inc. (NYSE:AVT), Anixter International Inc. (NYSE:AXE), Electrocomponents plc (LON:ECM), Premier Farnell plc (LON:PFL) and Houston Wire & Cable Company (NASDAQ:HWCC). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.
| Quarterly (USD million) | 2012-09-30 | 2012-06-30 | 2012-03-31 | 2011-12-31 | 2011-09-30 |
|---|---|---|---|---|---|
| Revenues | 1,656.2 | 1,672.7 | 1,606.0 | 1,589.5 | 1,580.4 |
| Revenue Growth % | (1.0) | 4.2 | 1.0 | 0.6 | 3.7 |
| Net Income | 63.4 | 58.9 | 53.0 | 54.8 | 53.9 |
| Net Income Growth % | 7.7 | 11.1 | (3.4) | 1.8 | 7.3 |
| Net Margin % | 3.8 | 3.5 | 3.3 | 3.5 | 3.4 |
| ROE % (Annualized) | 16.8 | 16.4 | 15.4 | 16.7 | 17.0 |
| ROA % (Annualized) | 7.7 | 7.4 | 6.8 | 7.1 | 7.1 |
Valuation Drivers
Wesco International Inc. trades at a lower Price/Book multiple (1.8) than its peer median (3.3). The market expects WCC-US to grow at about the same rate as its chosen peers (PE of 14.0 compared to peer median of 11.7) and to maintain the peer median return (ROE of 16.3%) it currently generates.
The company’s asset efficiency (asset turns of 2.0x) and net profit margins of 3.5% are both median for its peer group. WCC-US’s net margin continues to trend upward and is now similar to its five-year average net margin of 3.0%.
Economic Moat
The company enjoys both better than peer median annual revenue growth of 21.0% and better than peer median earnings growth performance 69.9%. WCC-US currently converts every 1% of change in annual revenue into 3.3% of change in annual reported earnings. We view this company as a leader among its peers.
WCC-US’s current return on assets is around the same as its peer median (7.1% vs. peer median 8.5%). This recent performance contrasts with its less than peer median return on assets over the past five years (6.2% vs. peer median 9.4%) suggesting that the company’s relative operating performance is improving.
The company’s gross margin of 20.3% is around peer median suggesting that WCC-US’s operations do not benefit from any differentiating pricing advantage. In addition, WCC-US’s pre-tax margin is less than the peer median (5.0% compared to 6.9%) suggesting relatively high operating costs.
Growth & Investment Strategy
While WCC-US’s revenues growth has been below the peer median in the last few years (0.1% vs. 5.7% respectively for the past three years), the market still gives the stock an about peer median PE ratio of 14.0. The market seems to see the company as a long-term strategic bet.
WCC-US’s annualized rate of change in capital of 2.4% over the past three years is less than its peer median of 7.1%. This below median investment level has also generated a less than peer median return on capital of 7.4% averaged over the same three years. This outcome suggests that the company has invested capital relatively poorly and now may be in maintenance mode.
Earnings Quality
WCC-US’s net income margin for the last twelve months is around the peer median (3.5% vs. peer median of 4.3%). This average margin and relatively conservative accrual policy (0.8% vs. peer median of -0.0%) suggests possible understatement of its reported net income.
WCC-US’s accruals over the last twelve months are around zero. However, this modestly positive level is also greater than the peer median which suggests some amount of building of reserves.
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