Wesco Earnings: Markets Spooked by Lowered 2023 Guidance; We Maintain Our Undervalued Call

The market sent Wesco’s WCC shares down approximately 14% in intraday trading after management lowered 2023 guidance. The key surprise was weaker-than-expected sales in the company’s electrical and electronic solutions segment. Organic sales in EES decreased 5% year on year, while adjusted EBITDA margins came in 150 basis points below the year-ago period. The main catalyst to lower sales was inventory destocking by customers, due to supply chain rebalancing. Supply lead times have improved, leading many customers to delay purchases of wire and cables. The company is now expecting flat year-over-year sales growth in 2023 for EES, compared with mid-single-digit growth previously.

Following the company’s lowered 2023 guidance, our fair value estimate decreased by $1, to $191. We think the market has overreacted to the short-term pressure. We believe EES can return to sales growth in 2024 once supply chains return to normal. Management made a point to mention that other categories within EES performed well, such as mega projects, helped by increased U.S. infrastructure spending. The industrial category is also growing solidly, giving us confidence in the company’s sales prospects in 2024 and beyond.

On a brighter note, Wesco’s remaining segments experienced strong sales growth. On an organic basis, utility and broadband solutions grew 10% year on year, while communications and security solutions increased 7%. All of the company’s segments have exposure to long-term tailwinds, including EES. We still think Wesco can grow consolidated sales by nearly 5% on average through the next five years while operating margins average 6% during the same period.

Even with the short-term weakness in EES, we believe Wesco trades at a discount. Currently, we estimate the stock is approximately 19% undervalued.