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Stock Strategist

This Stock's Price Is Absurd

Wesco is trading almost 50% below our fair value estimate.

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Wesco’s (WCC) stock sold off after the narrow-moat industrial distributor reported second-quarter sales that missed the consensus estimate and also lowered its full-year outlook. Management had warned during the June 13 investor day that second-quarter sales growth would probably be closer to the low end of its 3%-6% guidance. However, sales grew approximately 2% to $2.15 billion, falling short of both guidance and the consensus estimate of $2.17 billion. Management blamed the top-line miss on softer demand conditions in the United States, especially in April and May. However, sales strengthened in June (total organic sales up 5%) and preliminary July sales are up midsingle digits.

Wesco’s operating margin expanded 30 basis points to 4.6% (we calculate a very solid 14.5% incremental margin) as 2%-plus gross profit growth outpaced a 1% increase in selling, general, and administrative expenses. Wesco’s 19% gross margin was flat with the year-ago quarter because of faster growth from the company’s lower-gross-margin utility business and slowing “short cycle” sales (that is, maintenance, repair, and operations sales), which tend to have higher gross margins. Short-cycle weakness is not unique to Wesco; Ingersoll Rand (IR) called out slowing short-cycle sales as a headwind for its industrial business.

Brian Bernard does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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