WESCO's Whipsaw Seems To Have Over-Corrected

When I last wrote about WESCO (NYSE:WCC) in January of this year, I thought the Street was too negative on the shares. I was concerned about the prospect for lingering weakness in the Industrial and Construction sectors, as well as the likelihood of gross margin leverage, but I thought the gap between the share price in the mid-$30's and my fair value in the low $50's was too wide.

I didn't expect that the shares were going to shoot up more than 70% in the interim, but that's what has happened - despite the fact that the company's earnings haven't been that much better than expected. Then again, January of this year was at or near a point of peak pessimism in the market and it seems as though a lot of investors are back to thinking that WESCO is somehow going to deliver on pretty aggressive guidance for the next three to four years.

I'm not so bullish, although I have nudged my revenue estimates up a little bit, and my fair value as well. I believe distributors like WESCO, Rexel (OTCPK:RXEEY), HD Supply (NASDAQ:HDS), Grainger (NYSE:GWW) and so on are going to have a much harder time achieving gross margin leverage in the years to come, and I don't know that that's really reflected in expectations.

Although I do think WESCO has some strong competitive attributes, including a well-tested M&A strategy and a strong service component, I'd be cautious expecting large-scale changes from a company whose financials have been pretty consistent for many years now.

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WESCO's Whipsaw Seems To Have Over-Corrected