Connect with us

Recommendations

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

Published

on

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.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
0 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 5 (0 votes, average: 0.00 out of 5)
You need to be a registered member to rate this.
Loading...

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.




Feedback or Requests?

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

You must be logged in to post a comment Login

Leave a Reply

Recommendations

Trade Recommendation: Pundi X

Published

on

Altcoin season is in the air. If you’re not feeling it, then it’s probably because the season is moving inversely this time.

In 2017, the season started when big-cap names such as Ethereum, Ripple, and Monero made big moves at around the same time last year. Nowadays, these altcoins are frozen as they trade in a narrow range with very little volume. However, small-cap alts such as Ravencoin (RVN/BTC), ChainLink (LINK/BTC) and DOCK (DOCK/BTC) have risen by anywhere between 100% – 300%. We believe that the next candidate for a big push is Pundi X/Bitcoin (NPXS/BTC).

Technical analysis shows that NPXS/BTC is gearing to ignite a massive bull run. Right now, the market is still in accumulation mode as it is trading in a range between 0.00000021 and 0.00000030. However, we are seeing signs that tell us that this phase may be over soon.

Yesterday, October 22, the market got a massive volume influx of 11.198 billion Pundi X units. That figure is over 485% of its daily average. This suggests that the smart money is heavily buying positions at this level. In terms of timing, the volume uptick hints that we are at the latter stages of base building. The smart money bought heavy positions because the train is about to leave the station.

The strategy is to buy the breakout at 0.00000030 after NPXS/BTC generates volume of 4 billion Pundi X units. Those who bought at the bottom end of the range might take profits at the resistance. The market needs buyers to absorb the selling pressure and attract breakout traders.

Once breakout is complete, the market will likely have the momentum to rally to our initial target of 0.00000052 first and then 0.00000070.

The process may take a month.

Daily Chart of Pundi X/Bitcoin on Binance

As of this writing, the Pundi X/Bitcoin pair is trading at 0.00000025 on Binance.

Summary of Strategy

Buy: Breakout at 0.0000003 after volume of 4 billion Pundi X units is met.

Target: 0.00000052 first and then 0.00000070.

Stop: 0.00000028 after the breakout.

 

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.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
0 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 5 (0 votes, average: 0.00 out of 5)
You need to be a registered member to rate this.
Loading...

3.7 stars on average, based on 253 rated postsKiril is a financial professional with 4+ 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.




Feedback or Requests?

Continue Reading

Recommendations

Trade Recommendation: Loom Network

Published

on

The Loom Network/Bitcoin pair (LOOM/BTC) dropped to as low as 0.00001001 on August 14, 2018. At that price, the market lost almost 88% of its value from the 2018 peak of 0.00008199.

Like we’ve seen in many altcoin cases, LOOM/BTC started to bottom out after suffering tremendous losses. This process is always difficult to time, especially if the market has a price history of fewer than six months. However, we can always rely on reversal structures to see if the bottom is already in place. We’re seeing LOOM/BTC mark its bottom as well as end its downtrend using a reliable reversal pattern.

Technical analysis shows that LOOM/BTC has taken out resistance of 0.000019 on October 10, 2018. This triggered the breakout from the double bottom structure on the daily chart. The pattern tells us that the support area of 0.00001 has been created and has completed the retest. The creation of this support attracted bargain hunters and bottom fishers. This generated the momentum needed to breach resistance of 0.000019.

The breakout looks convincing as well. On the day of the breakout, LOOM/BTC generated volume that’s over 428% of its daily average. This suggests that the fear of missing out is creeping in. Participants are buying at a higher price in massive numbers. This is the state of mind that ignites powerful bull runs. 

The strategy is to buy on dips as close to 0.000018 as possible. The market is still close to overbought territory, which tells us that it may go below the breakout. As long as LOOM/BTC stays above 0.000018, it has the momentum to rally to our target of 0.000028.

The process may take more than a month.

Daily Chart of Loom Network/Bitcoin on Binance

As of this writing, the Loom Network/Bitcoin pair is trading at 0.00001962 on Binance.

Summary of Strategy

Buy: On dips as close to 0.000018 as possible.

Target: 0.000028

Stop: 0.0000175

 

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.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
0 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 5 (0 votes, average: 0.00 out of 5)
You need to be a registered member to rate this.
Loading...

3.7 stars on average, based on 253 rated postsKiril is a financial professional with 4+ 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.




Feedback or Requests?

Continue Reading

Recommendations

Trade Recommendation: NEO

Published

on

On our August 29, 2018 trade recommendation, we anticipated NEO/Bitcoin (NEO/BTC) to breakout from the large falling wedge on the daily chart. We emphasized the importance of buying only after the pair generates volume of 1 million NEO units. Without heavy volume, the breakout would not look convincing to breakout traders and trend followers. Hence, there wouldn’t be enough momentum to ignite a massive rally.

Though NEO/BTC broke out from the falling wedge as expected on August 31, the volume it printed was way below our requirements. As a result, the breakout rally was short-lived since bottom fishers saw the low volume breakout as an opportunity to take profits. The selling drove the market down. Nevertheless, this gives us a chance to buy the bottom before NEO/BTC takes off.

Technical analysis shows that NEO/BTC is respecting the historical support of 0.00245. This view comes after the pair successfully completed the retest when it dropped to as low as 0.00239 on October 15 but bulls came to the rescue and lifted the market above the support. We watched NEO/BTC from that point to see if the support will hold. The confirmation came on October 18 when volume suddenly surged. This was a signal that participants are comfortable accumulating at this level.

More importantly, the daily RSI appears to have printed a new higher low at 32.6. This is an encouraging sign as it shows that participants are no longer waiting for extreme oversold readings before entering long positions.

The strategy is to buy as close to 0.00245 support as possible. As long as the market remains above this level, it has a very good chance to rally to our initial target of 0.0034 and then 0.0046.

The process may take more than a month.

Daily Chart of NEO/Bitcoin on Binance

As of this writing, the NEO/Bitcoin pair is trading at 0.002574 on Binance.

Summary of Strategy

Buy: As close to 0.00245 support as possible.

Target: 0.0034 first and then 0.0046.

Stop: 0.00234

 

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.

Rate this post:

Important for improving the service. Please add a comment in the comment field below explaining what you rated and why you gave it that rate. Failed Trade Recommendations should not be rated as that is considered a failure either way.
0 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 50 votes, average: 0.00 out of 5 (0 votes, average: 0.00 out of 5)
You need to be a registered member to rate this.
Loading...

3.7 stars on average, based on 253 rated postsKiril is a financial professional with 4+ 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.




Feedback or Requests?

Continue Reading

Recent Comments

Recent Posts

A part of CCN

Hacked.com is Neutral and Unbiased

Hacked.com and its team members have pledged to reject any form of advertisement or sponsorships from 3rd parties. We will always be neutral and we strive towards a fully unbiased view on all topics. Whenever an author has a conflicting interest, that should be clearly stated in the post itself with a disclaimer. If you suspect that one of our team members are biased, please notify me immediately at jonas.borchgrevink(at)hacked.com.

Trending