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Wesco International (WCC)

Wesco International is the scale player in electrical, communications, and utilities distribution and supply chain services. Originally founded in 1922 as the distribution arm of Westinghouse Electric and Manufacturing Company, Wesco recently completed the integration of a transformational merger with communications and electrical distributor Anixter International. As the scale player in a highly fragmented industry, Wesco has no direct publicly traded comparables, and this fact combined with pandemic and post pandemic macroeconomic volatility have left this newly constructed business trading at a material discount to its historical and intrinsic earnings power.

In 2019 Wesco International was a business-to-business distributor serving industrial and nonresidential construction end markets. The business was cyclical and inevitable periods of stagnant industrial production and price stability pressured revenues and margins. A transformational merger with Anixter International made Wesco an economically resilient scale player in the secularly growing electrical, communication, and utilities end markets, but the deal added leverage in the midst of the COVID-19 induced economic shutdown. Decreased inventory turns from supply chain constraints were followed by post pandemic bullwhip effects as supplier lead times collapsed and buffer inventories were destocked. In the midst of such abnormal macroeconomic volatility, Wesco International so successfully integrated Anixter International that realized revenue synergies were more than thirteen times the initial guidance ($2.2 billion vs $170 million guide), leaving the transformed business trading at half of the markets’ multiple. While valuation disconnects in business models without publicly traded comparables are nothing new (Mastercard, Moody’s, Chicago Mercantile Exchange, and Ferrari were but a few), sustained earnings growth that shines light on these valuation asymmetries makes such opportunities short lived. With Wesco International, we see four main paths to sustained earnings growth and value creation.

First, Wesco is growing revenues and margins by taking market share and improving its pricing algorithms. In providing a one stop shop for 150,000 customers to access 1.5 million products from 50,000 suppliers, Wesco adds value to customer and supplier supply chains alike by lowering cost of ownership and increasing resilience. With the pandemic’s aftermath making supply chain resilience a focus for all executive suites, companies are increasingly outsourcing larger parts of their supply chains for Wesco to manage. A key value driver of this outsourced supply chain management is the more than seventy percent of Wesco’s sales that are attached to services. Services such as working on site with product selection, application, technical support, and logistics drive meaningful cost savings and productivity benefits for customers. Yet, due in part to its previously subscale market position, Wesco was lacking in its ability to properly account for the unit cost of these services and its cost-plus pricing algorithm failed to capture the value provided. Anixter International mitigates this value leakage by bringing expertise in cost accounting and in value-based pricing. We see a long runway for Wesco to layer on services to drive customer productivity and supply chain resiliency, and we believe that properly pricing for the value created ensures that this revenue growth translates into earnings growth.

Second, as the scale player, Wesco is now uniquely able to invest in technology in a way that has not been done before in business-to-business distribution. Central to any great process technology is well organized data that aids decision making across the enterprise. Previously, Wesco and Anixter lacked the scale to invest in technology to digitize their businesses. As the scale player in an industry where a majority of supplier sales go through distribution, Wesco has significantly more data on customers, operations, demand profiles, product flows, and what products customers need to maintain or upgrade. We see two main areas for Wesco to use technology to utilize this proprietary data to drive revenues, margins, and earnings growth. One, in accessing industry leading data at the point of sale, Wesco is able to proactively drive sales of higher margin products from preferred suppliers that work with Wesco to invest in innovation to drive end user demand. This represents a previously unutilized avenue to drive sales and mix. Two, while Wesco has a large network of logistics infrastructure capable of serving 99% of customers within one day, the network is sub optimized due to the historic focus on optimizing product flow between hub and spokes. Investments in technology have digitized the business such that data scientists and industrial engineers are now able to redesign and engineer processes to improve the physical flow of product from supplier to end customer, creating the impetus for increased inventory turns, reduced transportation costs, and growing margins. Collectively, investments in technology to digitize Wesco’s business are set to increase sales effectiveness, build cost advantages, and differentiate with services that will widen the gap in value proposition between Wesco and its fragmented base of small, privately held competitors.

Third, Wesco’s scale and technological superiority position the company to accelerate existing trends of industry consolidation. With Wesco accounting for thirteen percent of an industry where the top two hundred competitors combined account for just fifty-one percent share, competitive dynamics make it difficult for the fragmented base of competitors to offer a full suite of solutions to customers. A self-reinforcing flywheel of industry leading volumes creates more margin dollars for technology investments that strengthen product and services breadth that then attracts more customers wishing to sole source their supply chains. A highly fragmented competitor set of small, local, private, multi-generational businesses do not have the resources to compete with this flywheel. After having completed more than fifty acquisitions since spinning out from Westinghouse in 1994, Wesco has a proven ability to use its economically resilient countercyclical cash flow stream to acquire and integrate businesses with growing, complementary product and service capabilities at mid-single digit post synergy multiples. We believe Wesco can triple its market share of a growing market at high incremental margin.

Fourth, Wesco’s earnings growth profile is backstopped by an effectual royalty stream on several long-term secular tailwinds. Chief among these secular tailwinds is electrification. With electrification affecting everything from transportation to home heat pumps, increased demand from data centers and renewable power generation is straining an electric grid in need of maintenance and modernization. Electricity has long been seen as a commodity, but it is fast becoming a value driver for wide swaths of the economy. Wesco touches every part of the electrical value chain from the generating station to the meter on a house, and as such collects a toll when a product is upgraded. Second among the secular trends that Wesco is accruing a royalty on is the increased demand for bandwidth. Wesco touches every part of the broadband value chain from the data center to the last mile of connectivity. With increased bandwidth demand from higher data and mobile usage, Wesco accrues a royalty when this infrastructure is upgraded. Third among the secular trends that Wesco accrues a royalty on is industrial demand from any North American manufacturing renaissance that comes from both building factories and modernizing existing factories by putting in more capabilities for connectivity, artificial intelligence, and the internet of things. As a business-to-business distributor, Wesco accrues a royalty on each of these three long term secular tailwinds without requiring capital expenditures, research and development, or subjecting themselves to any meaningful capital deployment risks. Wesco’s position in the middle of the value chain provides a free option to ride several long-term secular tailwinds, all of which are further reinforced by $1.6 trillion in approved but not yet “shovel ready” fiscal spending (Infrastructure Investment & Jobs Act, Inflation Reduction Act, CHIPS and Science Act, and Rural Digital Opportunity Fund).

In Wesco, we see shareholder value accruing from sustainable, long-term revenue and earnings growth driven by self-help initiatives, market share gains, industry consolidation and secularly growing end markets.


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