Barron’s on Wabtec

Our very own Wabtec (WAB) got some love in this weekend’s Barron’s. They said the stock could jump 20% in a year.

Wabtec, as it is more commonly known, completed some 50 acquisitions in the past decade, growing overseas and expanding into the steadier transit market, which is less cyclical than freight. The $1.7 billion purchase last year of France-based Faiveley Transport, its largest deal to date, makes it a formidable rival in Europe, the world’s largest transit market, and Asia, the fastest-growing. About 65% of this year’s sales will come from abroad, up from 50% five years ago.

The deal’s timing is good. The outlook for global transit is the brightest in 20 years, says veteran industrials analyst Nicholas Heymann, of William Blair, who has an Outperform rating on the stock. The global mass-transit market’s growth has tripled recently to 4% to 5% a year as emerging nations like India look to ease urban congestion and a push for energy efficiency sparks investment in mass transit in Europe.

This is a long-term opportunity. For Wabtec, getting its brakes and safety technology into the new systems means gaining an edge in providing service and maintenance for the life of the vehicle, often 30 to 50 years. About 60% of sales will come from mass transit this year, up from some 40% five years ago.

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At 17 times 2018 earnings estimates, the shares trade slightly below the market multiple—and their historical price/earnings ratio of 22. Stephens analyst Justin Long says any skepticism is misplaced, given Wabtec’s record of exceeding expectations for acquisitions. He expects benefits from Faiveley to kick in during the second half. That, combined with a rail rebound, he says, could lift the stock to $95.

Wabtech’s improved positioning abroad will help drive growth. Instead of being a distant No. 3 to privately held Knorr-Bremse and Faiveley in European mass transit, Wabtec is now a formidable No. 2, with a 25% market share, up from 5%. Andrew Davis, transportation analyst at T. Rowe Price, says the combination “should boost the company’s revenue growth from a low-single-digit pace to mid-single digits.”

Wabtec’s freight business is also poised to grow. Sidelined locomotives are coming back into service, coal traffic appears to have bottomed, and intermodal traffic is picking up. “We will see the benefits, first in the aftermarket area, in the third and fourth quarters,” Chief Executive Raymond Betler tells Barron’s.

Broader industry trends could also lift Wabtec’s growth prospects. While the company expects new railcar orders to slow in the near term, increased usage of railcars means more maintenance that could spur demand for replacement parts. Aftermarket sales produce 60% of revenue and generate hefty profit margins.

Posted by on April 16th, 2017 at 6:35 pm


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