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WESCO International Inc WCC

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The New Wesco Era Is Off to a Great Start and Management Sees More Synergies; We Raised Our FVE 10%

Analyst Note

| Brian Bernard, CFA, CPA |

A new era began for Wesco after it completed its merger with close competitor Anixter in June. This quarter marked the first full quarter of combined results, and the firm reported a solid performance despite pandemic-related headwinds. Compared with pro forma prior-year results, revenue declined about 5% to $4.1 billion, but adjusted operating margin expanded 30 basis points to 4.8%. Adjusted free cash flow of $307 million was exceptionally strong, representing a 315% conversion ratio (adjusted free cash flow as a percentage of adjusted net income). More importantly, management raised its cost synergy targets. We weren't surprised to see upward-revised synergy targets because we felt that the prior goals were conservative. In our view, the market has underappreciated Wesco for some time, so we think the "underpromise and overdeliver" communication style is the right approach. Management now expects cost synergies of $100 million during the first year of the merger, $180 million in year two, and $250 million in year three compared with previous guidance of $68 million, $140 million, and $200 million, respectively.

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Company Profile

Business Description

Wesco International is a value-added industrial distributor that operates across four distinct end markets: industrial (36% of sales), construction (33%), utility (16%), and commercial, institutional, and government (15%). The company offers more than 1 million products to its 70,000 active customers through a distribution network of 500 branches and 10 distribution centers. Although Wesco generates almost all of its sales in North America, the company has a global reach, with operations in 15 other countries. With the Anixter acquisition in 2020, the firm's pro forma revenue increases to over $17 billion, and the combined entity easily surpasses W.W. Grainger as the largest industrial distributor in the United States.

225 West Station Square Drive, Suite 700
Pittsburgh, PA, 15219
T +1 412 454-2200
Sector Industrials
Industry Industrial Distribution
Most Recent Earnings Sep 30, 2020
Fiscal Year End Dec 31, 2020
Stock Type Cyclical
Employees 18,000