Company Reports

In 1994, Westinghouse Electrical sold its electrical distribution business, Westinghouse Electric Supply, or Wesco, to a private equity firm. Wesco went public in 1999. Since its separation from Westinghouse, Wesco has used most of its cumulative free cash flow on acquisitions, which have expanded its scale, diversified revenue, and fueled a meaningful portion of the company’s growth. Once squarely focused on construction end markets, Wesco now serves a much broader array of customers across industrial, construction, utility, commercial, institutional, and government markets.

In 1994, Westinghouse Electrical sold its electrical distribution business, Westinghouse Electric Supply, or Wesco, to a private equity firm. Wesco went public in 1999. Since its separation from Westinghouse, Wesco has used most of its cumulative free cash flow on acquisitions, which have expanded its scale, diversified revenue, and fueled a meaningful portion of the company’s growth. Once squarely focused on construction end markets, Wesco now serves a much broader array of customers across industrial, construction, utility, commercial, institutional, and government markets.

In 1994, Westinghouse Electrical sold its electrical distribution business, Westinghouse Electric Supply, or Wesco, to a private equity firm. Wesco went public in 1999. Since its separation from Westinghouse, Wesco has used most of its cumulative free cash flow on acquisitions, which have expanded its scale, diversified revenue, and fueled a meaningful portion of the company’s growth. Once squarely focused on construction end markets, Wesco now serves a much broader array of customers across industrial, construction, utility, commercial, institutional, and government markets.

Wesco ended 2023 with a disappointing fourth quarter. We lowered our fair value estimate by 2% to $192 (from $197 previously). The decrease in our fair value is largely due to downward tweaks to our 2024 sales and margin expectations, following new guidance from Wesco.

We elected to raise our fair value estimate by 3% to $197 (from $191 previously), following third-quarter earnings. The increase to our fair value estimate is largely attributed to the time value of money since our last update, but was partially offset by slight tweaks to our near-term sales expectations.

In 1994, Westinghouse Electrical sold its electrical distribution business, Westinghouse Electric Supply, or Wesco, to a private equity firm. Wesco went public in 1999. Since its separation from Westinghouse, Wesco has used most of its cumulative free cash flow on acquisitions, which have expanded its scale, diversified revenue, and fueled a meaningful portion of the company’s growth. Once squarely focused on construction end markets, Wesco now serves a much broader array of customers across industrial, construction, utility, commercial, institutional, and government markets.

In 1994, Westinghouse Electrical sold its electrical distribution business, Westinghouse Electric Supply, or Wesco, to a private equity firm. Wesco went public in 1999. Since its separation from Westinghouse, Wesco has used most of its cumulative free cash flow on acquisitions, which have expanded its scale, diversified revenue, and fueled a meaningful portion of the company’s growth. Once squarely focused on construction end markets, Wesco now serves a much broader array of customers across industrial, construction, utility, commercial, institutional, and government markets.

The market sent Wesco’s 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.

The key story exiting Wesco’s first-quarter earnings was continued free cash flow challenges. As a result, the market sent the company’s shares down approximately 14% in intraday trading. Free cash flow was negative $266 million. Some customers pushed payments into the second quarter, which was a drag on free cash flow. In addition, Wesco continues to hold higher-than-normal inventory to meet strong customer demand. On the bright side, the company noted that supply chains gradually improved throughout the quarter, showing that future inventory will likely be a lot lower than current levels. In the second quarter, we expect both accounts receivable and inventory to be less of a headwind to free cash flow, leading us to believe the company will be free cash flow positive. In our view, this sets up a pathway to strong free cash flow generation in the second half of 2023. Currently, we forecast Wesco to post nearly $800 million in free cash flow in 2023, a historic figure.

In 1994, Westinghouse Electrical sold its electrical distribution business, Westinghouse Electric Supply, or Wesco, to a private equity firm. Wesco went public in 1999. Since its separation from Westinghouse, Wesco has used most of its cumulative free cash flow on acquisitions, which have expanded its scale, diversified revenue, and fueled a meaningful portion of the company’s growth. Once squarely focused on construction end markets, Wesco now serves a much broader array of customers across industrial, construction, utility, commercial, institutional, and government markets.

In 1994, Westinghouse Electrical sold its electrical distribution business, Westinghouse Electric Supply, or Wesco, to a private equity firm. Wesco went public in 1999. Since its separation from Westinghouse, Wesco has used most of its cumulative free cash flow on acquisitions, which have expanded its scale, diversified revenue, and fueled a meaningful portion of the company’s growth. Once squarely focused on construction end markets, Wesco now serves a much broader array of customers across industrial, construction, utility, commercial, institutional, and government markets.

In 1994, Westinghouse Electrical sold its electrical distribution business, Westinghouse Electric Supply, or Wesco, to a private equity firm. Wesco went public in 1999. Since its separation from Westinghouse, Wesco has used most of its cumulative free cash flow on acquisitions, which have expanded its scale, diversified revenue, and fueled a meaningful portion of the company’s growth. Once squarely focused on construction end markets, Wesco now serves a much broader array of customers across industrial, construction, utility, commercial, institutional, and government markets.

Wesco continued to show its strength across various end markets in the fourth quarter. The company’s strong results led investors to send shares approximately 8% higher following the fourth-quarter earnings results. Management’s new 2023 guidance led us to increase our near-term sales and margin expectations for the company. As a result, our fair value estimate increased to $189 per share from $182.

In 1994, Westinghouse Electrical sold its electrical distribution business, Westinghouse Electric Supply, or Wesco, to a private equity firm. Wesco went public in 1999. Since its separation from Westinghouse, Wesco has used most of its cumulative free cash flow on acquisitions, which have expanded its scale, diversified revenue, and fueled a meaningful portion of the company’s growth. Once squarely focused on construction end markets, Wesco now serves a much broader array of customers across industrial, construction, utility, commercial, institutional, and government markets.

Wesco reported mixed third-quarter results, but that didn’t deter us from increasing our fair value estimate slightly to $182 from $181 (largely due to the time value of money). The company’s shares traded down significantly intraday (down 15%). We believe this was mainly due to the company’s free cash flow update. The key metric continued to trend negatively in the quarter (down $421 million year-to-date), as result of increased working capital. Accounts receivable and inventory came in at elevated levels due to high sales growth year-to-date. Wesco has increased inventory levels considerably to maintain service levels and support its growing backlog.

Wesco recently held its investor day, where it reaffirmed its 2022 guidance and shared its vision for the future. Recall, the company has been working to integrate its acquisition of close peer, Anixter. So far, management has done a good job of cutting out costs and cross-selling its products. In our view, this acquisition was significant for a couple of reasons. First, is the timing of the deal, which was in the midst of the pandemic. Second, Wesco increased its net leverage to acquire Anixter. Its net debt/trailing 12 month adjusted EBITDA spiked to 5.7 times in June 2020. Management has executed well on both fronts thus far by realizing both cost and revenue synergies, as well as bringing its net leverage down to 3.4 times, just below its target range of 2.0-3.5 times.

In 1994, Westinghouse Electrical sold its electrical distribution business, Westinghouse Electric Supply, or Wesco, to a private equity firm. Wesco went public in 1999. Since its separation from Westinghouse, Wesco has used most of its cumulative free cash flow on acquisitions, which have expanded its scale, diversified revenue, and fueled a meaningful portion of the company’s growth. Once squarely focused on construction end markets, Wesco now serves a much broader array of customers across industrial, construction, utility, commercial, institutional, and government markets.

Wesco wraps up the second-quarter earnings cycle for the distributors under our coverage. Overall, the national distributors have continued to perform well, despite a challenging supply chain environment. In our view, these players have been adept at leveraging their global network of suppliers (thousands of suppliers) to secure industrial supplies, while smaller regional distributors have lacked the distribution network to secure supplies.

In 1994, Westinghouse Electrical sold its electrical distribution business, Westinghouse Electric Supply, or Wesco, to a private equity firm. Wesco went public in 1999. Since its separation from Westinghouse, Wesco has used most of its cumulative free cash flow on acquisitions, which have expanded its scale, diversified revenue, and fueled a meaningful portion of the company’s growth. Once squarely focused on construction end markets, Wesco now serves a much broader array of customers across industrial, construction, utility, commercial, institutional, and government markets.

In 1994, Westinghouse Electrical sold its electrical distribution business, Westinghouse Electric Supply, or Wesco, to a private equity firm. Wesco went public in 1999. Since its separation from Westinghouse, Wesco has used most of its cumulative free cash flow on acquisitions, which have expanded its scale, diversified revenue, and fueled a meaningful portion of the company’s growth. Once squarely focused on construction end markets, Wesco now serves a much broader array of customers across industrial, construction, utility, commercial, institutional, and government markets.