Alex Roepers’ Newest Activist Target: Wesco by Activist Stocks
As we mentioned earlier this week, Alex Roepers Atlantic Investment Management went active at Wesco. The fund owns a 5% stake and on a pro forma basis it’s in the top fund’s top five.
The company is an electrical and industrial products distributor, operating much like the Fastenal business model – offering millions of SKUs. It’s got some 500 stores and operate distribution centers. Shares peaked last summer and fell along with oil prices. The biggest part of this weakness is likely overblown – only about 10% or so is from energy-related spending.
The industrial distribution market is still large and fragmented, with the key for Wesco going forward being acquisitions. Wesco’s business includes long-term contracts (good and bad), capping margins at times due to competitive pricing – yet does offer steady cash flow. The big opportunity is to get into higher margin areas like safety products.
Crudely, Wesco is the cheapest player – trading near 8x forward EV/EBITDA. Others – HD Supply, Fastenal, Watsco, WW Grainger – trade north of 12x. Wesco is also the cheapest in terms of EV/FCF, with a 7% plus FCF yield. Assuming low- to mid-teen earnings growth and just some minor multiple expansion, you could have a $115 stock in three years’ time. Not grandiose returns, yet, this doesn’t include any capital allocation rearranging upside that Roepers can generate.