WESCO Still Offers Electrification-Driven Upside

 

It's a little hard to claim that a stock that has doubled since late October 2020 may not be getting its full due, but such is the case with WESCO (WCC).

Given the company's leverage to electrical distribution and growth in electrification, data centers, and utility spending, I think there's a solid case for WESCO outgrowing GDP by around 100bp-125bp over the next decade. Add in the greater scale from the Anixter deal, in what is often a scale-driven business, and I think there's an argument for double-digit FCF growth and meaningful share upside from here.

 

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WESCO Still Offers Electrification-Driven Upside

Rexel SA Showing A Little More Juice In Its Turnaround

It has been frustrating waiting for Rexel (OTCPK:RXEEY) (RXL.PA) to deliver on its turnaround potential, and the shares had been steadily sliding lower this year until strong second quarter results reversed the trend. Now it seems that the company’s major suppliers are seeing better trends in electrification and automation, and the company’s own plans to improve performance in the U.S. and Europe seems to be paying off a little better. With healthy trends in non-residential construction in Europe and the U.S. and signs of margin leverage, there should be more upside for Rexel from here.

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Rexel SA Showing A Little More Juice In Its Turnaround

Margin Challenges And Growing Cyclical Worries Have Dimmed Rexel

The performance of industrial distributor stocks on a year-to-date basis really covers the map. Grainger (GWW) has been performing exceptionally well, Ferguson (OTCQX:FERGY) has done alright, HD Supply (HDS) is more or less flat, but the electrical distributors Wesco (WCC) and Rexel (OTCPK:RXEEY) are each down about 15%. Although some of Rexel’s trouble can be attributed to frustration and disappointment in the pace of margin improvement, I also believe growing worries about the industrial cycle are playing a role.

I like the value in Rexel shares, but there are risks with both execution and macro factors – it is tough to hold a good/improving company when investors are selling out of the sector. I’m bullish on the prospects for construction in Europe and ongoing improvements in the U.S. business, but if discrete manufacturing is slowing down, it will be harder for management to hit its margin improvement targets.

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Margin Challenges And Growing Cyclical Worries Have Dimmed Rexel

Rexel Plugged Into Improving Trends

Distribution is a tough business, and Amazon's (AMZN) entry into industrial distribution has not made life any easier for companies like Grainger (GWW), Fastenal (FAST), Rexel (OTCPK:RXEEY), or WESCO (WCC). Even so, I think there's a worthwhile opportunity in Rexel today, as the market seems to be overestimating the threat from Amazon, and underestimating the benefits to be had from an improving construction market in Europe, self-directed internal improvements, and the benefits to be had from further consolidation.

I don't expect torrid revenue growth from Rexel, but I do expect some growth and improving margins to drive more compelling FCF growth, as new management responds to an activist investor's involvement with far-ranging self-improvement initiatives. With around 20% to 25% upside from here, Rexel looks well worth considering.

Rexel's ADRs are not liquid, and that is a shame. Investors can nevertheless look to the Paris-listed shares (RXL.PA) which have far more liquidity and which are available through many larger brokerages.

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Rexel Plugged Into Improving Trends

Houston Wire & Cable May Be Past The Worst

There's an old piece of investing advice that says investors shouldn't reach for falling knives. In other words, don't buy the stock of a company based upon its recovery prospects while the company is still in decline. That's all well and good as advice goes, but the reality is that the market is a forward-looking place, and if you wait for concrete evidence of stabilization and improvement, you will definitely miss some of the upside.

This comes to mind with Houston Wire & Cable (NASDAQ:HWCC), as the company has logged almost three straight years of double-digit quarterly revenue declines and significant margin and free cash flow erosion. On the other hand, metal-adjusted MRO sales were up in the last quarter, and sales are expected to rise year over year for this fourth quarter. The shares got a good post-election bounce (before a roughly 10% pullback), and there are definitely risks that the power gen and oil/gas markets will remain weak for a while, but all in all, the risk/reward trade-off here looks interesting albeit high-risk.

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Houston Wire & Cable May Be Past The Worst

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

Seeking Alpha: WESCO Hammered Down, But Margin Questions Linger

Finding a beaten down industrial stock takes no effort these days, and WESCO (NYSE:WCC) certainly qualifies. These shares have fallen about 45% over the past year, surpassing the declines in other distributors like Grainger (NYSE:GWW), Rexel, HD Supply (NASDAQ:HDS), and Anixter (NYSE:AXE). Given the company's higher exposure to energy, perhaps it is not entirely unfair that WESCO would see a sharper drop, but I find it interesting that WESCO is also the only name on that short list that is expected to see revenue declines in both 2015 and 2016.

The North American industrial sector has weakened a lot more than I expected back in May of 2015, and that has led me to reduce my fair value estimate by about 25%. While I do believe that WESCO's core markets will recover in time, I still have concerns about the company's long-term margin leverage. Although WESCO is very efficiently-run from an SG&A perspective, I think gross margin leverage will likely disappoint the bulls and I don't see what will shake WESCO out of its long-term status as an average grower. So while WESCO does look undervalued today and should have more leverage to an industrial recovery, it wouldn't be first pick for a long-term holding.

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WESCO Hammered Down, But Margin Questions Linger

Seeking Alpha: Margin Leverage Limiting WESCO's Potential

None of the major industrial distributors have been doing especially well of late (other than HD Supply (NASDAQ:HDS)), but WESCO (NYSE:WCC) has had a rough time of it as industrial spending has weakened and the company has struggled to generate meaningful margin leverage. WESCO's steady-eddy performance is one of its strong points during the tough times, but the company's going to be hard-pressed to generate substantial margin upside without some underlying inflation as rivals compete hard for business and customers push back on pricing.

I like WESCO as a company, but I think management has a tough challenge in front of them - very lean SG&A spending doesn't leave much room for meaningful cost-cutting, pricing power limits the gross margin potential that I see, and breaking out of the company's long-term average revenue growth rate range in the mid-single digits may well require M&A at the cost of risk and leverage.

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Margin Leverage Limiting WESCO's Potential

Seeking Alpha: WESCO Still Waiting

WESCO (NYSE:WCC) hasn't exactly distinguished itself in the six months since I last wrote about the company. Admittedly, not many distributors have done well over that time, as HD Supply (NASDAQ:HDS), Grainger (NYSE:GWW), Fastenal (NASDAQ:FAST) and several others are in the red, but it is nevertheless frustrating that WESCO has paired a frustratingly slow recovery in key markets with shortfalls in its reported margins.

Pushing out some of the expected improvements in financial performance does take some upside out of my price target, but with a fair value in the mid-$80s, I still believe WESCO is a worthwhile name to consider as a play on a non-residential construction recovery. Management needs to show that it can deliver real results from its "One WESCO" strategy, but I do see a path for the company to generate better margins and asset turnover as it continues to integrate acquisitions and leverage end-market recoveries.

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WESCO Still Waiting

Seeking Alpha: HD Supply Outgrowing Its Markets At An Accelerating Rate

I liked HD Supply (NASDAQ:HDS) as a play on recovering construction and infrastructure markets back in March, but I wasn't expecting a nearly 25% move in the shares over the next six months. This was not just a "rising tide lifts all boats" sort of move either - industrial distributor MSC Industrial (NYSE:MSM) and electrical distributor WESCO (NYSE:WCC) are both up over that period as well, but only by about 3% and 5%, while Rexel (OTCPK:RXEEY), Wolseley (OTCQX:WOSYY), and Fastenal (NASDAQ:FAST) are in the red over that stretch. What has helped HD Supply greatly is that management is delivering on its guidance and establishing credibility with its plans to outgrow its underlying markets by a meaningful amount over the next few years.

I still believe that HD Supply is more of a momentum play than a value story. Even with expectations of a construction/infrastructure recovery and internal growth initiatives supporting double-digit growth over the next five years and long-term sales growth of 8%, I can't really get to an attractive discounted cash flow number. I don't expect that to matter much, though, so long as the company can continue to deliver above-market growth and ongoing margin leverage.

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HD Supply Outgrowing Its Markets At An Accelerating Rate

Seeking Alpha: WESCO Offers Another Way To Play Familiar Themes

I was lukewarm to positive on WESCO (WCC) six months ago (you can read that article here), and the stock has more or less matched the S&P 500 in the time since, rising about 10%. That's not too bad, particularly as two of the company's largest markets, industrial and construction, have yet to really rebound all that much. HD Supply (HDS) offers a lot of the same underlying exposures and market leverage, with an operational improvement kicker, but WESCO may hold more appeal for investors less inclined to gamble on an internal improvement story.

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WESCO Offers Another Way To Play Familiar Themes

Seeking Alpha: HD Supply Seeing A Turn In Non-Residential Construction

It may yet be early for all-clear on HD Supply (HDS), as "green shoots" could easily get trampled, but the company does seem to have its guidance dialed in better and underlying results are looking better. There's still some comp-group noise that has me questioning the sell-side's apparent love for this stock, but the valuation and opportunity seem in reasonable alignment these days.

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HD Supply Seeing A Turn In Non-Residential Construction

Seeking Alpha: Wall Street Slow To Abandon HD Supply's Long-Term Story

Covering HD Supply's (HDS) first quarter, I thought that the company was a solid collection of assets with real upside to a recovery in construction and internal operating margin improvement, but I thought the valuation was a little rich. I remarked that the shares would be more interesting at $20, and sure enough investors had a couple of days in which they could have bought below that level.

Since then the shares are up 10% even though the company is not doing particularly well staying on target with respect to sell-side estimates. Even though the company reset revenue expectations lower once again, and a change in CFOs so soon after an IPO is alarming, it looks like investors are more focused on the EBITDA margin improvement and the long-term prospects. I still believe that there are better options in the distribution sector, but I'll also acknowledge that Wall Street *wants* to like this story and there's room for both operating results and multiples to head higher.

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Wall Street Slow To Abandon HD Supply's Long-Term Story

Seeking Alpha: Can PowerSecure's Odd Mix Generate Real Cash Flow?

Just on the surface level, PowerSecure (POWR) looks like it should be in some businesses with attractive long-term prospects. The company's distributed generation operations address the dual realities that not as many commercial/industrial sites have backup power as you might imagine and that there are savings to be gained from using on-site generation for peak shaving/demand response. Elsewhere, LED lighting and energy efficiency are almost perennial hot topics, and though utility infrastructure is not necessarily a growth market on its own, transmission & distribution (T&D) work has been lagging long-term demand and PowerSecure is building off of a low base.

Clearly the Street is feeling more cheerful about the name. The shares are up more than 170% over the past year and roughly 300% from the mid-2012 lows, and a small cadre of well-known institutions own worthwhile chunks of the stock (though some of that is for ETFs). While I'm actually more bullish with my numbers than management's own presentation, I'm not quite as bullish as the sell-side at this point - I do believe these shares remain undervalued, but a price target in the $20s might be a bit much right now.

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Can PowerSecure's Odd Mix Generate Real Cash Flow?

Seeking Alpha: Even With The Debt, WESCO Is Interesting

I'm well aware that not everyone uses discounted cash flow to analyze and value stocks, and that's perfectly fine. Not only is there no such thing as "one right way", but using different methods in tandem can tell you some interesting things about a stock. Along those lines, WESCO (WCC) looks like a pretty interesting value if you compare its EV/EBITDA multiple to other distributors and perhaps even cheap if you go with a PEG-based approach.

The problem I have with earnings/PE approaches, though, is that I happen to think that debt matters. And WESCO has a lot of that. So I'm torn - WESCO has more than enough cash flow and operating income to cover its interest expense and debt service, and the company's debt load is not likely to undermine its leverage to a rebound in commercial construction or utility spending. Given that Wall Street often just ignores debt when there is revenue growth and margin leverage to focus on, I'm not going to rule out the possibility of further gains in WESCO's share price, even though netting out the debt would normally generate an uninspiring fair value target.

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Even With The Debt, WESCO Is Interesting

Seeking Alpha: HD Supply An Expensive Play On Construction And MRO

Admittedly, I have a thing for the industrial/MRO distribution sector - I own MSC Industrial (MSM) and follow others like Fastenal (FAST), Grainger (GWW), and WESCO (WCC) pretty closely. Although it's a very competitive space with a strong cyclical component, it's a fragmented market where companies with a good business plan (e.g. MSC Industrial and Fastenal) can really make a name for themselves.

Into this mix comes one of the bigger dogs in the yard - HD Supply (HDS). Once part of Home Depot (HD) and then sold to private equity, HD Supply has already enjoyed a pretty good post-IPO run, rising about one-third since its debut. Although I do appreciate the leverage that HD Supply offers to a U.S. construction rebound, not to mention margin improvement and consolidation potential, I think the multiple today is demanding unless you are really bullish on the company's growth plans and the recovery potential of the U.S. construction market.

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HD Supply An Expensive Play On Construction And MRO

Investopedia: Eaton's Conservatism Clashes With Street's Enthusiasm

Wall Street badly wants to believe in the narrative of a strong second half recovery, and companies that don't toe that particular line are seeing their stock prices suffer. While I didn't hear much that was really very new in Eaton's (NYSE:ETN) comments after the second quarter report, the Street took the shares down almost 6% as management's comments took the high end of guidance off the table. Although I do expect Eaton to reap good revenue growth from the Cooper deal, as well as long-term cost benefits and lower taxes, the shares are still no bargain unless you're willing to go with pretty exceptional growth expectations.

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Investopedia: Slowing Sales At Fastenal Not Denting Investor Enthusiasm ... Yet

It's an unfortunate reality of financial writing today that you can't express concern about a stock's valuation and/or investor expectations without reaping a whirlwind of angry readers claiming you hate the company (while in secret many are shorting the stock). Be that as it may, only a fool wouldn't appreciate the business that Fastenal (Nasdaq:FAST) has built in the industrial distribution market, but that doesn't mean that the shares are cheap – particularly with growth becoming more of a concern than at any time before in this latest post-recession recovery.

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Seeking Alpha: Lawson Products Toils Away In Obscurity

I would never say that the industrial maintenance, repair, and operations (MRO) space is wildly popular with investors, but analyst coverage for Grainger (GWW), Fastenal (FAST), Applied Industrial Technologies (AIT), and MSC Industrial (MSM) does at least stretch into the double-digits. By comparison, Lawson Products (LAWS) is barely covered at all.

It takes more than obscurity to make a bargain, though. To that end, I'm concerned about the long history of uninspired financial performance from Lawson, as well as a business model that appears to overlap with many better-positioned rivals without a true, strong core of specialization. On the other hand, management is relatively new here and the MRO market is still scattered enough to let a company like Lawson grow.

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Lawson Products Toils Away In Obscurity

Seeking Alpha: MSC Industrial Hits The Cliff

The markets reacted to the fiscal cliff resolution last week with relief, but the dickering and delays had real consequences to companies. As one example, industrial distributor MSC Industrial (MSM) saw a very pronounced stagnation of business in its fiscal first quarter, and the Street was not happy to hear lower guidance from management. While I expect investors to approach this stock with caution until ISM numbers and reported growth improve, this remains a quality long-term name for investors to consider.

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MSC Industrial Hits The Cliff