This Electrical Product Maker Is Well Positioned
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Shares of Wesco International (NYSE: WCC) hit a 52-week high last week, as the market rally supported buying activity. But, investors may still not be fully valuing the supplier of electrical products to the industrial, construction, and utility end markets. Profit comparisons are apt to gain momentum moving forward. I will now discuss the basis for this belief and draw some comparisons with industry peers.
Wesco completed the acquisition of EECOL Electric Corp. in December. EECOL was Canada's largest distributor of equipment, and the purchase should boost Wesco's top line by nearly $1 billion this year, an approximately 15% increase. Importantly, related earnings accretion ought to be around $1.00, or more than 22%. With the buyout, about one-third of revenues will be derived from international sources.
Expansion into developing overseas markets has been one of the major growth drivers for firms in this sector, along with acquisitions. The EECOL addition delivers on both of these fronts. The only downside of Wesco's largest ever asset purchase is the much higher debt balance (more than $1 billion year over year at Dec. 31) due to the financing.
Acquisitions can certainly solidify the prospects for an electrical product maker that has a sizable proportion of business in slow customer markets. For Wesco, a weakening of U.S. government spending that would otherwise be detrimental should be offset by EECOL, as well as a broadened presence with overseas governments. This is a strategy that has helped companies such as FLIR Systems (NASDAQ: FLIR), the manufacturer of thermal imaging systems with a large U.S. government customer contingent. FLIR, of note, is also targeting higher-growth markets through acquisitions, such as that several years ago of Raymarine, a company serving the growing boating market.
As it is, Wesco's industrial sales are climbing and demand is strong. Elsewhere, its business with non-residential construction entities is soft, but may pick up on the heels of the housing upturn, as one typically lags the other. The institutional market (schools, hospitals etc.), along with commercial spending, might well support results.
In all, even with flattish year-over-year profitability from ongoing operations, the EECOL buyout would add appeal to WCC shares. Sales are likely to grow in the teens percentage wise and share profits may well advance upwards of 30% in 2013.
I liken Wesco's situation on a smaller scale to that of Applied Industrial Technologies (NYSE: AIT). AIT, an industrial product distributor, is benefiting from acquisitions. It relies on improvements in industrial production and capacity utilization for growth. Both metrics have been slowly gaining ground according to the Federal Reserve’s website.
AIT is busy on the acquisition trail, mostly buying out much smaller entities. The company also is seeing gains from cost controls. It is guiding for an acceleration of earnings in the second half of 2013.
The upside potential for AIT's Service Center-based distribution segment is decent. It also operates a Fluid Power unit that serves manufacturers and is growing. Plus, AIT has the leeway to fund further buyouts that might provide further increases. Thus, AIT shares are worth adding to a portfolio and might receive a boost from positive earnings surprises as the year progresses.
Electrical equipment stocks are more than just cyclical in certain instances. In addition to sector exposure, one must look into how the companies are expanding geographically and through acquisitions to gauge profit outlooks. Both ECC and AIT should both be considered as companies that may outperform behind their managements' growth plans.
Damon Churchwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!