Wesco Aircraft (WAIR) sparked my interest after ranking value attributes for a basket of over 3,000 companies.
At first it was the large debt reduction since 2014, then the aggressive and historical outsized insider buying over the past two months, mean reverting stock performance with a -44% 52-week price change near a 52-week low. The enterprise value declined 50% from the first fiscal quarter ending March 2014 ($3.191 billion) to Aug. 24 ($1.606 billion). Further, a renewed interest by patient value institutions reporting additional buying for the quarter reported June 30. These and other attributes warranted a closer examination into Wesco.
Wesco is one of the largest international distributors and providers of supply chain management services to the aerospace industry. The company offers aerospace products, including hardware, chemical and electrical with over 565,000 active SKU. Founded in 1953 with 50 locations and $1.50 billion in 2016 sales, the company's services include quality assurance, kitting and JIT supply chain management. Industries served are commercial aerospace, aviation, defense, energy, pharmaceutical and electronics.
It's been several years of an endless string of self-made failures that destroyed large amounts of shareholder value.
The Carlyle Group acquired Wesco back in 2006 and took it public in 2011. Since the IPO it's been a slow steady market and intrinsic value destroying decline. Recent goodwill write-offs are from poor acquisition. This helped drive selling. Wesco purchased Interfast in 2012 for $134 million in cash. Interfast offers fastener-based solutions for a wide range of applications globally. Then Haas Group bought in 2014 for $550 million in cash. The Haas Group reported $573.5 million in 2012 revenues as a global provider of chemical supply chain management solutions to the commercial aerospace, airline, military, energy and other markets. Additionally margins dropped from the low 20% range to the current high single digits.
During third-quarter 2017 earnings call management presented slides to explain the current issues and go forward plan. But analysts on the call were tired of excuses. Scathing comments such as "Haas (acquisition) has been a disaster," "has the board hired a banker and is reviewing the present value of what one can achieve today – or the value achieved today versus the present value of your operating plan that you're developing." Additional comment made: "how spectacular this thing went off the rails from when the company first went public, it's remarkable."
Management responded to analysts' concerns with the following comments. The"entire board is committed to doing what's best for the shareholders, and that includes evaluating any alternative strategies to maximize that long-term shareholder value."Â "No. We have not hired a banker yet. And again, my focus is on turning this thing around." "Our job right now and our focus and our priority is to turn this around." "I know that the entire board is committed to doing what's best for the shareholders, and that includes evaluating any alternative strategies to maximize that long-term shareholder value." "It's fixable. As I said at the beginning and a couple of times through my prepared remarks, a lot of this is self-inflicted."
Tangible measures* listed below may hint Wesco is near a market bottom.
Below are favorable summary attributes* with supporting tables.
*Tangible net assets grew from March 2014 negative -$104.230 million to the MRQ balance of positive $239.121 million or an increase of $343.351 million. The main driver of this improvement is the $395.592 million debt reduction. In contrast, total equity dropped during the same 2014 to MRQ period from $992.290 million to $687.810 million or a decline of $304.480 million. This in comparison to a net tangible increase of $343.351 million. The main driver for the equity decline is the intangible/goodwill write-off of $647.831 million.
*Market overreaction to the downside with a 50% drop in enterprise value from the first fiscal quarter ending March 2014 ($3.191 billion) to Aug. 24 ($1.606 billion). A mean reverting -44% 52-week price change. Now trades near its 52-week low of $6.95 off 52-week high of $15.77.
*Consistent positive operating and free cash flow going back to 2012. The noncash charges are the primary drivers impacting reported negative net income.
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*Recent material outsized positive insider buying versus historical activity signals conviction coupled with some 2017 activity purchased above the current price.
*In a market of increasing risk and future value skepticism these value style institutions added shares to their existing Wesco positions. David Dreman, founder of Dreman Value Management, added shares at $10.26 per share. Barrow Hanley Mewhinney & Strauss, known for its strict adherence to traditional value disciplines, added 296,293 shares to its existing position of 464,638 shares at an average price per share of $11.33. Chuck Royce added more shares to the existing 2,790,423-share position at the average price of $13.87 per share. The Carlyle Group holds 23.19% of the total shares outstanding. Makaira Partners owns 9.69% of TSO and added 1,474,630 additional shares during August. MSD Capital (Michael Dell) owns 5,045,304 shares or 5.01%.
*Historical tangible book and revenue valuations improvement.
*The trailing six-month (March 2016 to June 2017) total for gross profit is $517.50 million and $367.50 million for SGA. This compares favorably to the preceding six-month rolling period (September 2014 to December 2015). See below.
Below are the month-ending results:
Wesco Aircraft Holdings has a large diversified customer base operating an asset-light business. The TTM revenue of $1.433 billion is up 37% from 2013 annual revenue of $902 million based on two acquistions. Gross profit over the same period increased 15% or $52 million. Valuation for EV/GP was 6.25 for 2013 versus a more favorable 2.13 for the TTM. Poor integration of two acquisitions mentioned above accelerated SGA far faster than the increase in GP; hence, negatively impacting operating income. Management committed to improving expense control.
The main risk is further EBITDA decline and then the inevitable violation of loan covenants that use an EBITDA-debt ratio. But the stock has favorable probabilty for a one-year or less value trade or the longer holding period to realize potential larger gains with a full turnaround and company sale. I initiated a placeholder position looking to add shares if the stock moves lower.
Disclosure: Long Wesco.
