WESCO International, Inc. (NYSE:WCC)

WESCO International, Inc. (WCC) is a provider of electrical construction products and electrical and industrial maintenance, repair and operating supplies (MRO). The company serves approximately 115,000 customers globally, offering more than 1,000,000 products from more than 23,000 suppliers utilizing automated, electronic procurement and inventory replenishment system.

The analysis presented is based on a price of $24.27.

The EPS has shown solid growth over the last eight years, with a compounded annual rate of 42%. Although the free cash flow has been positive throughout this time, it has fluctuated substantially; the last four years have been far better than the earlier four. In general, the return on equity (ROE) has been increasing from the 14% evidenced in 2001 to the 39% found in 2007; in 2008, it fell to the more pedestrian 29%.

Before I look at the valuations, I look at three indicators of financial safety. For this stock, all three are quite good. The Altman Z is 7.59; below 1.8 is risky, above 3 is the safe range. The Piotroski F is 8; 2 or below indicates caution, while 8 or 9 indicates that the stock is expected to rise within the next year. The Sloan accrual is -7.23; 5 or higher is high risk, while -5 or lower is excellent.

I use more than one valuation method to gauge intrinsic value; the first three all provide at least a reasonable margin of safety (MOS). The first three are standards in the valuation literature. The estimate based on Graham’s formula was $133 (82% MOS). The Earnings Power Value (value of the firm) was estimated, on a per share bases, to be $45 (46% MOS); while I like EPV to be at least 50%, I considered this close enough not to be a barrier to recommendation. The Discounted Cash Flow estimate valued the stock at $146 (83% MOS).

The last two were based on a spreadsheet found on the AAII website; these are designed to mimic Buffett’s valuation methodology. One is based on projecting EPS growth 10 years into the future based on past EPS growth; I discount the resulting valuation to reflect the price at which the stock will realize a compounded earnings (including dividends when applicable) return of 15%. Based on this method the target purchase needs to be below $30, and at the current price there is a 19% MOS.

The second is based on estimating EPS growth through the sustainable growth rate. The per-share projected book value is estimated by taking the previous year’s book value, adding EPS and subtracting dividends (when applicable). The projected EPS is estimated by multiplying the projected book value by the average Return on Equity, and the projected dividend is estimated by multiplying the projected EPS by the average payout ratio. I then discount the resulting valuation to reflect the price at which the stock will realize a compounded earnings return of 15%. Based on this method the target purchase needs to be below $40, and at the current price there is a 39% MOS.

To ascertain that the price is attractive to me, I take one more thing into consideration. At the current price, would I expect an immediate 15% return on my investment (ROI) based on earnings and dividends? In this, the EPS represents about 15.6% of the share price by itself (there is no dividend yield to add in).

Based on value and safety, I think WCC has good investment potential. The only flaw that emerged from my analysis is the earnings power value, which in the context of the whole analysis was close enough not to disqualify the company from investment consideration.