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Investment Recommendation: Wabtec Corp (WAB) can Surprise on the Upside

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Wabtec Corp (Westinghouse Air Brake Technologies Corp) (NYSE: WAB) manufactures technology-based products for locomotives, freight cars, passenger transit vehicles and power generation equipment. The company caters for both the original equipment and aftermarket applications.

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Key Findings

  • Dynamically growing revenues
  • Strong and growing margins
  • Bullish technical position despite a cyclical downturn in the segment
  • Targeted strategic acquisitions provide base for diversified growth
  • Recommendation: Buy

The Company’s History

Though the current company – Wabtec Corporation – was incorporated in 1999 with the merger of Westinghouse Air Brake Company(WABCO) and MotivePower Industries Inc, the roots of the company through WABCO date back to 1869. A company in operation for about one and half centuries instils confidence.

Nevertheless, in this age, one cannot make decisions based on a century old history alone. A more acceptable approach would be to look at the company’s performance in the past decade and then extrapolate it with the prevailing economic conditions to arrive at an investment decision.

Company’s performance in the last decade

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Source: – Wabtec Investor Presentation March 2017

From 2006 to 2016, the company’s revenue increased from $1088 million to $2931 million. That’s a Compound Annual Growth Rate (CAGR) of 10.42%. However, it is not enough if the company only sells goods, its ability to earn a profit on the sales is equally important.

Therefore, analyzing the management’s ability to generate income, we find that it has increased from $85 million in 2006 to $352 million in 2016. That’s a CAGR of 15.27%, which is better than the sales growth. This shows the management is continually looking to improve performance. They have improved the operating margin from 11.9% in 2006 to 17.5% in 2016.

The markets have rewarded the strong performance of the company accordingly.

Source: 2016 Annual report Wabtec Corp.

If we compare the cumulative return on investment of Wabtec with that of the S&P 500 index, its peer group (both old and new) between 2011-2016, we find Wabtec to be a clear outperformer, as seen above.

Though the long-term picture looks good, if one looks at the company’s performance in 2016 – it has deteriorated on almost all fronts. This shows that the business environment has changed, which has caused a drop in revenues and net income.

Headwinds in the freight rail market

In 2016, NAFTA freight rail traffic was down by about 5%. This forced the railroad companies to cut down their CapEx, which declined by about 15%. As a result, Wabtec’s sales and net revenue fell compared to the previous year.

For 2017, the company expects the headwinds to continue, which will reduce the revenues by about $120 million.

Acquisition of Faiveley Transport in 2016

Wabtec has continued to diversify its markets and products to reduce the cyclical impact of the US freight market. In that effort, Wabtec successfully completed majority acquisition of Faiveley Transport, which will add new products and technologies and diversify the business model.

“We estimate synergies to be about $15 million to $20 million in 2017, and we expect the long-term annual synergies of at least $50 million to be achieved by year three,” said Al Neupaver, Executive Chairman during the Q1 2017 earnings call on April 15, 2017.

However, because of higher interest cost due to increased debt, stock dilution and purchase price accounting charges, the numbers will not be EPS accretive on a net basis in 2017.

Management is moving in the right direction

We believe that the management is taking the right steps to diversify their portfolio and expand operations into high growth markets – Asia Pacific, India, Australia, Western Europe, Germany, France and the UK – through acquisitions.

The management did not stop their acquisitions after Faiveley. Wabtec continues to make small-ticket strategic acquisitions to increase its existing market share or expand its product portfolio.

So far in 2017, the company has acquired Aero Transportation Products, Thermal Transfer, and Semvac. However, these acquisitions are all very small compared to Faiveley.

Nevertheless, while comparing the Q1 2017 results with Q1 2016, the readers should keep in mind that the latest numbers are inclusive of operations from Faiveley and other acquisitions.

Performance in the first quarter of 2017

The company continued to struggle with its performance in the Q1 2017. The comparisons are given below.

Measure Q1 2017 Q1 2016
Gross profit as % of Net Sales 29.40% 33.10%
Operating expenses as % of Net Sales 16.90% 14.60%
Income from operations as a % of Net Sales 12.50% 18.40%
Diluted EPS $0.77 $1.02

However, there were no surprises in the earnings, as the management had forecast that its first quarter will be the weakest and the results would improve each quarter for the rest of the year. Though the company sees challenges ahead in the freight segment, it expects the growth in the transit segment to offset most of it.

After the Q1 2017 results, the company has stuck to its full-year guidance of revenues of $4.1 billion and earnings per share of $3.95-$4.15, excluding restructuring and transaction charges and non-controlling interest related to the Faiveley acquisition.

We expect the company to beat its yearly guidance

We believe that the company has been conservative in its guidance for 2017 and has not factored in a few positives.

The US rail traffic is showing signs of revival and the US carload traffic this year is up 6.8% over the previous year, while the intermodal units are up 2.3% during the same period. Though the figures are still well below the 2014 and 2015 numbers, the trend change is positive for Wabtec.

“All things considered, May was a good month for rail traffic,” said Association of American Railroads Senior Vice President John T. Gray.  “Thirteen of the 20 commodity categories we track had higher carloads in May 2017 than in May 2016, including the four biggest categories — coal, chemicals, crushed stone and sand, and grain.   Excluding coal, carloads in May were up 4.1%, their biggest monthly increase in more than two years, and May was the best intermodal month of the year.”

If the current government is able to slash the corporate tax cuts, as planned by President Donald Trump, then the railroad companies are likely to increase their CapEx, which should help Wabtec to beat its revenue and its earnings per share.

Valuation

Though we have proved that the company’s fundamentals are strong and the management is taking the right steps to diversify and shield its portfolio from a slowdown in individual markets, what we pay for the business is also important.

Though Wabtec trailing p/e of 28.57 looks pricey compared to the S&P 500 p/e of 21.2 of and the industry average p/e of 21.8, a historical comparison shows that Wabtec has commanded a higher P/E than the S&P 500 in the past 7 out of 10 years, according to data from Morningstar.

If one compares the forward p/e, the difference is much narrower with WAB at 22.2 and the S&P 500 at 19.9. Hence, at the current price of $88.21, the stock is not overly expensive. If Wabtec can beat its revenue and earnings per share guidance, according to our assumption, the valuation will become favourable.

The stock has a consensus price target of $95 and is rated as a strong buy by 9 analysts and a hold by one analyst,  according to Nasdaq.com.

Risks to our analysis

The global economy continues to be weak and susceptible to a slowdown. A global weakness will also affect US railroad traffic and CapEx plans of the companies. The projects in the pipeline can also get delayed. All these will adversely affect Wabtec’s results.

A sharp fall in the S&P 500 due to unforeseen circumstances can push the stock down, however, that will only be a short-term phenomenon, unless the fundamentals take a turn for the worse.

What do the charts forecast?

The stock has formed a bullish ascending triangle pattern, which will complete on a breakout and close above $90 levels. The breakout gives a pattern target of $102 on the stock. Once the stock breaks out of the triangle, it shouldn’t fall back into it. Therefore, we can keep a stop loss of $84, which is just below the 50-day exponential moving average. Hence, this trade offers us a risk-reward ratio of 1:2.

However, if the S&P 500 corrects, WAB is unlikely to remain unaffected. A fall to $83 and thereafter to $78 levels can be expected, if the S&P 500 breaks below the 2320 levels. Our bullish view on the stock changes only if the stock breaks below the $76 levels. Until then, all dips are a buying opportunity.

Recommendation

Wabtec commands a higher P/E compared to its peers and the S&P 500 due to its strong historical performance and a strong management.

For the short-term momentum traders, we recommend a buy at $90 with a stop loss at $84 and a likely price target of $102.

For the longer-term traders, we advise a buy on dips closer to $83 and $78 with a stop loss of $72 and a target of $104 and higher.

Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



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3 Comments

3 Comments

  1. fkohist123

    June 29, 2017 at 5:00 pm

    Rakesh

    Is the jump in debt net of cash related to the Faively acquisition and how would the short vs long term distribution of those liabilities affect our outlook?

    • Rakesh Upadhyay

      June 29, 2017 at 5:31 pm

      Hello fkohist123,

      The Faiveley acquisition cost $1.8 billion, out of which about $1.2 billion was the cash portion, whereas the rest was equity. Out of the $1.2 billion of cash, around $325 million was the existing cash on hand and the rest was taken using a senior notes offering of $750 million, company’s revolving credit facility and term note.
      Though the interest and other expense has increased to $15 million, it shouldn’t effect the short-term operations because the company will gain more via savings through synergies.
      In the long-term, the purchase should turn out to be profitable. The management has been clear that they want to reduce their debt and the company can easily do so with the cash they generate.
      Hence, outcome is positive for the long-term and neutral in the short-term.

  2. fkohist123

    June 29, 2017 at 6:25 pm

    Brillint. Thanks

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Altcoins

Trade Recommendation: XMR/BTC Pair Throwback

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The XMR/BTC market (Monero) has been in downtrend on the hourly chart after posting a high of 0.0225 on December 6 and failing to hold critical support at 0.02. It went to as low as 0.0145 on December 8 before respecting RSI at 32 where it established support. The market used the new support level to rally and generate one higher low after the other. It recently attempted to reclaim support at 0.02 but was repelled by bears. Currently, the market is trading around 0.019 levels where it appears to have created another higher low.

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Technical analysis shows a large reversal pattern in the hourly chart that can take the XMR/BTC pair to 0.025. Even though the market failed to breach resistance at 0.02, investors should not see it as a failed breakout. What we’re seeing is a throwback which is a temporary retreat in price. Throwbacks are common in breakout plays and are often seen as a bullish signal. The next time the market attempts to breach 0.02 resistance, it has a much better chance of breaking it with conviction.

The strategy is to buy breakout at 0.02 with immediate stop at 0.0189.

Hourly XMR/BTC Chart on Poloniex

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As of this writing, XMR/BTC is trading at 0.018714 on Poloniex.

Summary of Strategy

Buy: breakout at 0.02

Target: 0.025

Stop: move below 0.0189 after buying breakout at 0.02.

Disclaimer: The writer owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



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Altcoins

Trade Recommendation: FCT/BTC Bullish Reversal

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The market reach its all-time high back in June this year when FTC/BTC (Factom) reached 0.01463162. Unfortunately, the pair wasn’t able to sustain its momentum. It created a lower high several days later at 0.01066744 which signalled investors to take profits or cut their losses. As a result, the market tumbled and lost 93.17% in value from its all-time high. Such a tremendous loss would have created an atmosphere of despair in the market. Usually, that’s when the savviest traders come in.

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Technical analysis reveals that the worst is behind the pair. FCT/BTC touched support at 0.001 on the daily chart twice and respected it on both occasions. This is a good indication that the market has found a reliable support level. In addition, hourly chart shows that a large reversal pattern is underway. The pair may have retreated when it nearly touched 0.002, but it generated a new higher low in the process at 0.00156566. The throwback is a bullish signal that enables the pair to gather momentum to break resistance at 0.002.

The strategy is buy on breakout at 0.002. Breach that level and the market reclaims 0.003. Sell that level because it is a strong resistance.

Hourly FCT/BTC Chart on Poloniex

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As of this writing, FCT/BTC is trading at 0.001738 on Poloniex.

Summary of Strategy

Buy: breakout at 0.002

Target: 0.003

Stop: move below 0.0018 after buying breakout at 0.002.  

 

Disclaimer: The writer owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



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Trade Recommendation: NZDJPY

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The daily chart gives us a sell signal. The price is at the possible reversal zone formed by the resistance level and SMA100. RSI is going to confirm price reversal in the overbought zone. The 4H gives us a trend reversal signal based on a bearish divergence. RSI confirms price reversal from the resistance zone. MACD supports downward movement. DMI allows opening short trades. Pending orders for sell should be placed at 78.70 with stop at 79.25 level. Profit targets are 78.25 and 77.60 support levels. Don’t risk more than 3% from your deposit in this trade.

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Market: NZDJPY
Sell: 78.70
Stop: 79.25
Profit Targets: 78.25 and 77.60

Disclaimer: The analyst does not have investments in NZDJPY.

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Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



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