WESCO International Discusses Outlook for 2017

By Lee Samaha Markets Fool.com

With expectations for a recovery in U.S. industrial output in 2017 already in place, investors in industrial products provider WESCO International, Inc. (NYSE: WCC) must have eagerly awaited the company's fourth-quarter results. In the end, the headline numbers in the quarter were less important than the nuance within them and management's positive outlook for the year. There are subtle but real signs of recovery here, so let's take a closer look at the report and what management said.

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WESCO International fourth-quarter results: The raw numbers

Let's start with the headline figures:

  • Fourth-quarter sales declined 3.7% in the quarter, compared to guidance for a decline of 4% to 1%.
  • Fourth-quarter operating margin of 4.6% came in toward the bottom end of the guidance range of 4.5% to 4.8%.
  • Full-year adjusted diluted earnings per share (EPS) of $3.80 came in toward the low end of the previous guidance range of $3.75 to $3.90.

As you can see, the headline numbers were slightly disappointing and in themselves didn't suggest that a recovery is on the way. However, the guidance for 2017 and associated commentary was more positive. First-quarter and full-year guidance for 2017 were as follows:

  • First-quarter sales guidance for a decline of 3% to 0%, with operating margin in the range of 3.8% to 4.1%.
  • Full-year sales guidance for growth of 0% to 4%, with operating margin in the range of 4.4% to 4.6%.
  • Full-year diluted EPS guidance in the range of $3.60 to $4, implying earnings will be flat at the midpoint.

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Management merely reiterated the guidance given on its outlook call in December, so no surprises there, and no upgrade to 2017 expectations.

A quick look at year-over-year growth for each end market demonstrates that three of the company's four end markets remained in negative territory in the quarter.

Data source: WESCO International, Inc. CIG = commercial, institutional and government. Chart by author.

What management had to say

Looking past the numbers, the tone on the earnings call was a lot more positive:

  • Fourth-quarter sales grew sequentially for the first time in five years.
  • CEO John Engelreported "improving momentum with our industrial customers" -- industrial end markets make up around 36% of WESCO's sales.
  • Within industrial end markets "bidding activity levels are up year-over-year and sequentially in the fourth quarter," Engel added.
  • "Two of the segments that are part of the segments that are up sequentially are two of our largest segments and that is oil and gas and metals and mining," said Engel.
  • On construction (34% of sales) Engel said, "Our outlook for the nonresidential construction market is modestly positive this year."

Indeed, other companies have also reported an improving environment. For example, industrial supply company MSC Industrial Direct Co (NYSE: MSM) recently reported some green shoots of recoveryin its monthly sales data.In addition, industrial supplierFastenal Company (NASDAQ: FAST)reported sales growth of 2.7% in December for its stores that have been open for more than five years -- its fastest growth rate since July 2015.

Although WESCO's numbers or commentary weren't quite as positive as those given by MSC Industrial or Fastenal, those companies tend to have a higher exposure to maintenance, repair, and overhaul (MRO) spending, which typically improves before capital spending -- where WESCO has heavy exposure -- starts to flow.

Image source: Getty Images.

In addition, the picture of its construction end markets will become a lot clearer toward the spring and summer when construction activity kicks in, while CIG end markets will also be influenced by federal government spending under PresidentDonald Trump.

Looking ahead

All told, WESCO's numbers were lackluster but the commentary was positive, and companies across the industrial sector are starting to report improving conditions. Investors will want to look out for more budding shoots of recovery before feeling fully confident, but the company appears to be on the right track.

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Lee Samaha has no position in any stocks mentioned. The Motley Fool owns shares of and recommends MSC Industrial Direct. The Motley Fool recommends Wesco International. The Motley Fool has a disclosure policy.