EUR 850.00 For Business Accounts Only

Morningstar | Wesco Replaces Anixter as Our Top Industrial Distributor Pick

We think Anixter International and Wesco International are significantly undervalued, currently trading at approximately a 40% discount to our fair value estimates.

We previously preferred Anixter because of its historically more balanced capital-allocation strategy and our belief that its resumption of special dividends and/or share repurchases was on the horizon, which we saw as a potential catalyst along with improving fundamentals. However, Anixter disclosed a multiyear enterprise resource planning system implementation that it expects to fund with gross margin improvements. While a new ERP system should ultimately result in greater efficiencies and long-term cost savings, ERP implementations are not without risk and can lead to business disruption and earnings volatility, which could derail our thesis of improving fundamentals over the near term. We also think management may be less willing to return capital to shareholders during the "business transformation."

Meanwhile, Wesco's fundamentals have been improving, the company has been repurchasing its stock, and a notable activist investor (Blue Harbour Group) has taken a stake in the company. Furthermore, if Anixter were to stumble with its implementation, Wesco may be positioned to capitalize longer term. As with Anixter, we think Wesco is generally well insulated from competition from Amazon Business. In our view, both stocks are cheap, but we think Wesco has comparatively stronger catalysts on its side. As such, Wesco is now our top industrial distributor pick.