Fairly Valued After Significant Increase
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Wesco International (NYSE: WCC) recently reported quite an impressive third quarter. The company's net sales increased 4.8% year over year, from $1.58 billion last year to $1.65 billion this year. Operating profit was $103 million, 12.3% higher than the same quarter last year. The net income was $63.4 million, marking a year-over-year growth of 17.7%. Its EPS had a growth of 12.6% compared to Q3 2011, staying at $1.25 per share for the third quarter of 2012. John Engel, Wesco’s Chairman and CEO, commented that the company posted its eighth consecutive quarter of double-digit EPS growth on a year-over-year basis.
Right after the earnings announcement, Wesco’s share price jumped nearly 14%, from $57.17 to $65.11. The significant increase in its share price would make everybody feel excited, but should new investors come in after the rise? As rational investors, we have to dig deeper to decide whether we should buy this stock.
Price volatility
In the last 5 years, Wesco has experienced quite a bit of volatility in its share price. Its Beta is very high at 2.15, and its 52-week price range of $34.70-$68.19 is evidence that the stock has experienced quite a few ups and downs.
The business
The company provides logistical support and supply chain management, mainly in industrial, construction, utility and commercial, and Institutional and Governmental markets. It also sells maintenance and industrial supplies, and it distributes over 1 million products from more than 18,000 suppliers. Wesco’s customer base is quite large and diverse, with around 65,000 active customers.
Balance Sheet strength
As of September 2012, Wesco had $1.54 billion shareholders’ equity, around $720 million in debt, $1.87 billion in total liabilities and $108 million cash on hand. Wesco has quite a good balance sheet position, as its interest coverage is currently 7.64x. This interest coverage can show that its operating income can cover its interest payments quite comfortably.
Valuation
Currently, Wesco is trading at $65.11 per share. The company's total market capitalization is $2.85 billion, and its enterprise value is $3.06 billion. Trailing twelve months, its EPS is $4.55 per share. So after a 14% increase in its stock price, the market values the company at 14.3x P/E and 1.85 P/B.
Industry peers
Two of Wesco’s main competitors are Anixter International (NYSE: AXE) and W.W. Grainger (NYSE: GWW).
|
|
WCC |
AXE |
GWW |
|
Operating margin (%) |
5.63 |
5.77 |
13.24 |
|
Net Margin (%) |
3.42 |
3.08 |
8.21 |
|
ROE (%) |
15.93 |
19.19 |
25.72 |
|
D/E (%) |
48 |
81 |
6 |
|
P/E |
14.3 |
9.5 |
21.8 |
|
P/B |
1.85 |
1.9 |
5.2 |
Among the three, Wesco seems to be quite fairly priced. Anixter is valued at 9.3x P/E and 1.9x P/B, whereas Grainger is valued at 21.8x P/E and 5.2x P/B. Grainger is the most expensive for a reason, as it has the highest operating margin and net margin (13.24% and 8.21%, respectively), and delivers the highest return on equity of 25.72%, while employing the least amount of debt. Grainger’s D/E is only 6%.
My foolish take
Among the three players, I would prefer Anixter to the other two. Grainger seems to be the most expensive with the most impressive operating figures. Anixter and Wesco seems to be quite comparable in terms of operating margin and net margin. However, Anixter delivers a higher return on equity, partly because of higher debt employed, and it is selling for a single digit P/E ratio. As for Wesco, personally I would rather wait for the price to come down before thinking of initiating any position.
hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.
