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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.

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

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 (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 9 rated postsRakesh Upadhyay is a Technical Analyst and Portfolio Consultant for The Summit Group. He has more than a decade of experience as a private trader. His philosophy is to use technical analysis for momentum trading and fundamental analysis for long-term positions. Rakesh likes to keep himself fit by lifting weights and considers himself to be a spiritual person.




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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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Trade Recommendation: NEO

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NEO (NEO/USD) looks like a market that wants to break out of accumulation. The market started the accumulation process on December 7, 2018 when it established support of $5.50. This crypto traded around that level for a couple of weeks until a surge in volume showed participants that the market was ready to move higher. The volume uptick ignited a rally that sent the market to as high as $9.36 on December 24, 2018.

If the market was still bearish, NEO would have dumped back down to $5.50 support or even went below it. However, the market generated a higher low set up of $6.92 on December 28, 2018. That was enough for many to start placing long positions in the market.

Technical analysis shows that NEO/USD breached resistance of $9 on January 8, 2019. This triggered the break out from an inverse head and shoulders pattern on the shorter time frames. As a result, the market rallied to as high as $10.08 on January 9.

While NEO is currently pulling back, the rally gave the market its first higher high in months. If NEO can stay above support of $7.30, the market’s sentiment will turn from neutral to slightly bullish.

The strategy is to buy on dips as close to $7.30 support as possible. The 100 moving average on the 12-hour chart as well as the 200 moving average on the 4-hour chart are crawling around that price area. They will help keep the price above the support.

Should the price manage to stay above $7.30, the market will likely generate the momentum to rally to our target of $9.00. Take that out and the next target is $13.50.

The process may take a less than month.

12-hour Chart of NEO/US Dollar on Binance

As of this writing, the NEO/US Dollar pair is trading at $7.86 on Bitfinex.

Summary of Strategy

Buy: As close to $7.30 as possible.

Targets: $9.00 and $13.50.

Stop: $7.10

 

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 (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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3.8 stars on average, based on 308 rated postsKiril is a CFA Charterholder and financial professional with 5+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and ETFs, as he does his own crypto research and is the subject matter expert at ETFdb.com. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.




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Trade Recommendation: Komodo

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Komodo (KMD/BTC) printed a fresh 2018 low of 0.00013 on November 24. At that price, the market lost almost 90% of its value from last year’s high of 0.0012598. More importantly, KMD/BTC breached the line in the sand of 0.000154. This means that the market had no known support below that level. In other words, there was no way of knowing when Komodo might bottom out.

Thus, we had to wait for one of two things to happen for this coin to become tradeable. The first is to wait for the market to establish a new support. The second is to see whether the market can reclaim 0.000154. Fortunately, Komodo preferred the second option.

After reclaiming 0.000154, it rallied to as high as 0.0002509 on December 31. While the market is currently pulling back, it is giving us the opportunity to buy the bottom end of the range.

Technical analysis shows that KMD/BTC is headed to support of 0.000154. This view comes after the market broke below the range midpoint of 0.0001968 on January 6, 2019. Komodo then retested it as resistance on January 10.

On top of that, Komodo is also forming a bear flag on the shorter time frame. This suggests that the continuation of the short-term bearish trend. Also, the market just breached its diagonal support while creating the bear flag. With this breakdown, we can form the expectation that Komodo is going down to the range low.

The strategy is to be patient and buy as close to 0.000154 support as possible. As long as KMD/BTC stays above this level, we are correct to assume that the market is currently trading sideways. Thus, after accumulation at the range low, Komodo will likely climb to our initial target of 0.0001968. Take that out and the next target is 0.000239.

The process may take a month.

Daily Chart of Komodo/Bitcoin on Binance

As of this writing, the Komodo/Bitcoin pair is trading at 0.0001791 on Binance.

Summary of Strategy

Buy: As close to 0.000154 as possible.

Targets: 0.0001968 and 0.000239.

Stop: 0.000148

 

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 (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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3.8 stars on average, based on 308 rated postsKiril is a CFA Charterholder and financial professional with 5+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and ETFs, as he does his own crypto research and is the subject matter expert at ETFdb.com. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.




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Trade Recommendation: WINGS

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WINGS (WINGS/Bitcoin) bounced off lows of 0.00001702 on September 12, 2018. At that price level, the market lost over 90% of its value from last year’s peak of 0.00018. Nevertheless, the heavy losses inspired bottom pickers and bargain hunters to come together and start a buying frenzy. This ignited a strong rally that enabled WINGS to take out the top end of the range of 0.00003088 and climb as high as 0.00004173 on November 7.

At that point, WINGS needed to flip 0.00003088 resistance into support in order to trend higher. Unfortunately, bears reclaimed the resistance as market participants took advantage of the rally to lock in gains. This sparked a selling activity that saw WINGS drop to our range low. The good news is this allows us to bottom pick the market.

Technical analysis shows that WINGS/BTC is trading sideways. This view comes after the market respected our range low of 0.0000184. With bulls successfully defending the support, we now have a double bottom pattern on the daily chart. This tells us that a durable low is in.

In addition, the drop to the bottom end of the range has given technical indicators the time they need to cool off. The daily RSI is far from overbought territory. Also, we can see how volume significantly declined ever since WINGS tapped the range high. This tells us that the market’s sentiment is shifting from profit-taking to base-building.

The strategy is to buy as close to 0.0000184 support as possible. As long as WINGS/BTC stays above this level, it will likely gather the momentum to rally to our target of 0.00002458. Take that out and the next target is 0.00003088.

The process may take a month.

Daily Chart of WINGS/Bitcoin on Binance

As of this writing, the WINGS/Bitcoin pair is trading at 0.00002004 on Binance.

Summary of Strategy

Buy: As close to 0.0000184 as possible.

Targets: 0.00002458 and 0.00003088.

Stop: 0.0000177

 

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 (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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3.8 stars on average, based on 308 rated postsKiril is a CFA Charterholder and financial professional with 5+ years of experience in financial writing, analysis and product ownership. He has passed all three CFA exams on first attempt and has a bachelor's degree with a specialty in finance. Kiril’s current focus is on cryptocurrencies and ETFs, as he does his own crypto research and is the subject matter expert at ETFdb.com. He also has his personal website, InvestorAcademy.org where he teaches people about the basics of investing. His ultimate goal is to help people with limited knowledge of finance and investments to create investment portfolios easily, and in line with their unique circumstances.




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