Why Shares of Wesco Aircraft Took Off on Tuesday

MarketsMotley Fool

What happened

Shares of Wesco Aircraft Holdings (NYSE: WAIR) traded up 11.8% on Tuesday afternoon, before retreating back to up 5%, following a report that the aerospace component distributor was exploring its options. The deal talk comes not long after the long-struggling company reported its best quarter in recent memory, but Wesco still faces a challenging future as an independent.

Continue Reading Below

So what

Reuters reported on Tuesday that Wesco has hired investment bankers to explore acquisition interest in the company, according to unnamed sources, stressing that the deliberations are preliminary and that the outcome is far from certain.

The report does not say whether Wesco is responding to an expression of interest from a potential acquirer or testing the waters on its own.

Wesco, a distributor of fasteners, consumables, and related products to the aerospace sector, has been an underperformer in recent years, and its competitive position became more complicated last year when Boeing (NYSE: BA) acquired Wesco archrival KLX in a bid to grow its distribution business.

Wesco responded with a cost-cutting plan it calls Wesco 2020 designed to streamline the company and help it better compete with Boeing and other distribution efforts. Its fiscal second-quarter results showed some indications that the turnaround plan was progressing, with CEO Todd Renehan saying he is "pleased with our progress" on the plan to extract $30 million in annual cost savings.

Now what

Wesco's long-term plan is to position itself as an alternative to Boeing's massive scale and reach for airplane and supplier customers who are cautious about becoming overly reliant on one large corporation. That's a great pitch, but difficult to pull off.

Not everything about the recent quarter was cause for celebration. Gross margins fell 160 basis points year over year due to what the company described as "strategic" contract renewals that had lower pricing, and due to slowness in Europe and Asia.

It remains to be seen if Wesco is being dragged into a pricing war, or at least forced to accept lower pricing to keep key customers. Either way, it is easy to see why Wesco management might be interested in seeking out a deep-pocketed partner.

10 stocks we like better than Wesco Aircraft HoldingsWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Wesco Aircraft Holdings wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of March 1, 2019

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.