WESCO International: Thinking Green?

May.18.09 | About: WESCO International, (WCC)

By Ken Nagy, CFA

WESCO International, Inc. (NYSE:WCC) is one of the largest distributors of electrical products in the U.S. Both revenue and EPS fell short of consensus estimates in the last quarter. All the end markets look increasingly challenging in 2009. However, management initiatives could limit the downward pressure on results. We feel the longer-term growth potential in the utilities market is substantial.

Focus on Utilities

The main drivers in this market are housing starts, capital projects, ongoing maintenance and natural disasters. The U.S. central power grid is degenerating due to improper maintenance. Over the past 50 years, transmission and distribution companies resorted to geographical expansion, which enabled them to enjoy higher benefits of scale. Investment in new technology and corresponding efficiency enhancements were not given due importance.

We think that power utilities are likely to change their focus. We expect to see increased investment in the upgrade and maintenance of existing infrastructure, as well as the construction of new, more contemporary and more automated power plants. Power utilities are also increasingly being driven by legislation, to adopt greener production policies. Therefore, the products targeted at green solutions are likely to see long-term growth.

Management stated that bid activity continued in the last quarter, although revenue was likely to decline in 2009, as utilities adjusted to lower demand and cut inventories accordingly. WESCO’s financial strength, integrated supply capabilities and product range makes the company an attractive choice for investor-owned utilities in this environment.

The softness at public power utilities is partly on account of the residential market slowdown, and partly related to the shift in utilities’ spending from distribution to transmission and alternative energy. Management appears confident that the company has not lost any market share, and believes that the increased spending on the transmission side only indicates increased demand for distribution products over the longer term.

Sejuti Banerjea contributed to this post.