Going for Growth

12/15/2006 12:00 am EST

Focus:

Richard Moroney

Editor, Dow Theory Forecasts

Expert investor Richard Moroney plies his trade by focusing on companies with fundamental strengths, giving special consideration for those with tremendous sales and earnings gains--like this established company benefiting from several of its industry's current trends...

"WESCO International (WCC NYSE), North America's largest provider of electrical-construction products and maintenance, repair, and operating (MRO) supplies, is positioned for continued growth. The September quarter marked WESCO's 10th consecutive quarter of double-digit sales growth. Sales rose 24% and per share earnings climbed 96%. Consensus estimates project per-share-earnings growth of 67% this year and 22% in 2007. The company is benefiting from growth in its end markets, new customer accounts, geographic expansion, and strategic acquisitions.

"WESCO sells to more than 100,000 customers worldwide, including manufacturers, construction firms, utilities, and government agencies. Rising demand for its products and services reflects increased automation of business processes and a growing outsourcing trend that favors low-cost, efficient suppliers. At the same time, upgrades of the U.S. utility grid are also driving demand. According to Electrical Wholesaling magazine, wholesale distribution has grown about 5% a year over the last 20 years and is now a $74 billion market. The market for electrical MRO supplies is growing rapidly because of outsourcing and could potentially grow to be worth $380 billion.

"WESCO's distribution markets are highly fragmented--the four top distributors account for only 18% of total industry sales. Because of its size and financial strength, WESCO is well-positioned to remain the industry's lead consolidator. The company's other competitive advantages include: The ability to manage large multisite maintenance and procurement projects, a broad product line of more than 1 million products, and extensive distribution capabilities, including 370 branch locations, eight distribution centers in North America, Mexico, Europe, Africa, Asia, and the Middle East.

"WESCO plans to boost its market share by expanding into new markets, such as retail construction, education and health-care facilities, and regional and national contractors. It has made progress at capturing large accounts requiring nationwide distribution, creating recurring revenue from multiyear agreements. Since 2002, its national-accounts program has grown at an annual rate of 20%. WESCO has made at least 27 acquisitions since 1995 and plans to continue its growth through acquisitions, moving into new geographic markets and broadening its product mix.

"In November 2006, WESCO acquired Communications Supply Holdings, a leading national distributor of power-network equipment and industrial wire and cable products. Its $600 million in sales should increase WESCO's per-share earnings by $0.35 to $0.40 in 2007.

"WESCO trades at 14 times projected earnings of $4.73 per share over the next 12 months, in line with its peer-group average."

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