On Tuesday, Wolfe Research reiterated its Outperform rating on WESCO International (NYSE: WCC) stock, with a steady price target of $202.00. The firm's commentary highlighted the potential for WESCO to achieve mid-teens operating leverage if it can grow its top-line above inflation rates.
This growth is contingent on positive shifts in market segments such as utility and broadband, which offer above-average margins, and the expectation that the company is nearing a steady state in its digital investments.
The research firm outlined a trajectory for WESCO, suggesting that the company could reach an EBITDA margin of around 8% by 2027, which it deems reasonable, and potentially surpass 10% after 2030.
The analyst noted the company's unexpected aggressive approach toward mergers and acquisitions, particularly in the software and services sectors, which could introduce some strategic confusion among investors. However, these acquisitions are seen as manageable and could integrate well with WESCO's existing operations.
The report also commented on the possibility of WESCO achieving a free cash flow yield of 13% by 2027, translating to earnings per share (EPS) between $20 and $25. Wolfe Research expressed a preference for a more pronounced commitment to stock repurchases to solidify investor confidence and suggested that firmer boundaries around the leverage target of 1.5-2.5 times would be beneficial until the company reaches a higher margin level.
Looking ahead, the firm anticipates that a return to growth, albeit in the low single digits, from the fourth quarter of 2024 could serve as a significant catalyst for the company.
Wolfe Research has adjusted its 2025 EPS forecast to a range of $12.50 to $14.50, based on core sales growth of 1-4%, which places WESCO's stock at approximately 12 times the projected trough EPS and free cash flow.
The conclusion is that the risk/reward profile remains favorable as WESCO navigates through this period of establishing a stronger foundation for growth.
InvestingPro Insights
WESCO International's financial metrics and market position offer additional context to Wolfe Research's optimistic outlook. According to InvestingPro data, WESCO's market capitalization stands at $8.26 billion, with a P/E ratio of 12.72, aligning closely with Wolfe Research's valuation estimates. The company's revenue for the last twelve months as of Q2 2024 was $21.95 billion, with a gross profit margin of 21.55%, indicating a solid financial foundation.
InvestingPro Tips highlight that WESCO has been aggressively buying back shares, which addresses Wolfe Research's suggestion for more pronounced stock repurchases to boost investor confidence. Additionally, the company's high shareholder yield and strong return over the last five years support the positive long-term outlook presented in the article.
It's worth noting that WESCO's liquid assets exceed short-term obligations, providing financial flexibility as it pursues growth strategies and potential acquisitions mentioned in the report. While the stock price movements are described as quite volatile, this could present opportunities for investors aligned with Wolfe Research's bullish stance.
For readers interested in a deeper dive, InvestingPro offers 5 additional tips that could provide further insights into WESCO's market position and financial health.
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