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Jonathan Poland
Jonathan Poland
Articles (453)  | Author's Website |

Risk-Reward With Wesco

The Fortune 500 industrial distributor is a bargain under $60

October 10, 2018 | About:

Wesco International (NYSE:WCC) is a leader in supply chain solutions by distributing electrical, industrial and communications products for both maintenance/repair, original equipment manufacturing and big construction projects.

The company has more than 70,000 customers who choose from over 1 million products. It generates the majority of its $8 billion in revenue from about 500 branches in North America, but with distribution centers in 15 other countries outside the U.S., Wesco has a global reach in case of economic volatility or new market potential.

Business breakdown

On the top line, 70% comes from industrial and construction products with the rest spread across utility, commercial and government segments. Wesco's stock has had a rough time as of late, with the price off 13% year to date and 38% since its high in 2014. That said, from its August earnings presentation, the company's fundamentals may be heading in the right direction again. After steady declines in 2016 and the start of 2017, Wesco has documented solid organic growth over the last five quarters thanks to demand for the company's electrical supplies and logistic services. In fact, analyst exceptions for earnings per share are north of $5 this year and $5.30 per share in 2019.

Future potential

If these numbers are reached, at its current price multiple, the stock would rise to $80 again, a 38% gain. Long term, the company should continue to build upon its book value, which has increased from $17.33 to $46.10 in the last 10 years. If book value growth continues on trend, Wesco's stock price could reach $160 in the next decade, a gain of 180%.


Wesco operates in very fragmented markets but does so at scale with a global footprint, large product and supplier base, as well as critical service differentiation from smaller local and regional competitors. It also has $110 million in cash and very little capital expenditures to worry about. All told, it is a solid company with a boring but reliable business model.

Product distribution is an easy business to get into, but a hard one to scale. Wesco acts as a conduit between 26,000 suppliers and 70,000 customers. Maybe some of those suppliers would eventually want to go direct to the customer, but unless (or rather until) a platform is built to handle this specific part of the market, Wesco will continue to be a much-needed resource.

Amazon Business could disrupt the industrial distribution industry, taking market share and pressing Wesco’s margins lower. Hint: Wesco should try to build something like Amazon Business while it still can. The one aspect that may be holding it back the most is the dividend payments. The company pays zero money out.

And, since it's not a growth story, investors are likely to look at W.W. Grainger (NYSE:GWW) or Fastenal (NASDAQ:FAST) before Wesco. Each of those firms are much larger in terms of market capitalization, but not by sales. Fastenal generates 3.8x the income on half the sales, but is valued 6x higher by the market. Grainger generates 4.3x more profit on slightly higher annual revenue, but is 7x larger by market cap. And, if 2018/2019 numbers come into fruition, those valuations will get more out of whack.

Disclosure: I am not long/short any stock mentioned in this article.

About the author:

Jonathan Poland
I used to manage money. I still publish my thoughts on stocks here on GuruFocus, mainly on big cap companies. I rarely write about stocks that I own. Thank you for reading.

Visit Jonathan Poland's Website

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