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.