We noticed a bull thesis on Wesco International, Inc. (WCC) on ValueInvestorsClub by rc197906. VIC is our preferred site because the ideas there are generally posted by aspiring analysts who try to think out of the box. We find the ideas presented on the site well thought out and worth a serious read. Click here for the full article. Below we summarized the WCC bull thesis. WCC shares were trading at $84 when this thesis was published.
Originally founded in 1922 as Westinghouse Electric, the Pittsburgh, Pennsylvania-headquartered WCC is a multinational company that provides electric distribution, logistic expertise, communications and systems capabilities around the world. The Fortune 500 company employs 18,000 people, and is the industry leader with a 13% market share (see largest utility companies in the world).
The recently concluded acquisition of Anixter International (AXE) has made WCC the largest player in the peer group with a doubled revenue base of $17 billion. The combined company has made WCC a stronger company – better than WCC or AXE on standalone basis. The combined company will benefit from reduced competition, distinct capabilities, cross selling in select areas, and greater organic growth. Distribution businesses are not overly capital-intensive, and hence tend to generate steady FCF to efficiently manage highly leveraged balance sheet. The positive cash flow in this industry is pretty much counter-cyclical in nature. This has created Private Equity Funds’ interest in the industry, including WCC, which has seen CD&R taking a 11% stake.
While the pandemic has delayed the revenue growth for immediate term, it has also helped ramp up the cost-reduction measure, which can quite possibly beat company’s own revenue guidance.
The combined new entity has the potential to generate $550 million in free-cash-flow, which as mentioned above can be used to lower the leverage. The analyst’s base case is a FCF of $1billion and $20 billion in revenue by 2023, which should be accretive to shareholder value by about $25. An assumed $1.1billion EBITDA would safely value the stock at a 9x multiple or $120 a share.
See also 10 best electric utility dividend stocks to buy.