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Wabtec Corp: Consistent Earnings with Good Share Performance to Patient Investors

September 26, 2011 | About:
Westinghouse Air Brake Technologies Corporation (WAB) can be considered one of the world’s largest providers of value-added, technology-based equipment and services dedicating to the rail industry. In the report of the company itself, WAB believes that it holds a substantial market share (50%) in North America for braking-related equipment.

Zacks has recommended the strong buy for this stock, as it reported the surprising quarterly result on Zacks Consensus for the eighth quarter in a row. Sales jumped 28% because of the growth in freight group, and its black log increased 40% from the end of 2010. In addition, the company raised its full-year guidance for its performance with the revenue expected to grow 20% for the year.

WAB focuses mainly on two principal business segments, the Freight Group and the Transit Group. The Freight Group manufactures components for freight cars and locomotives, and supplies railway electronics, train control equipment, related heat exchange and cooling systems. The customers are railroads, leasing companies, manufacturers of original equipment such as locomotives and freight cars and utilities.

The Transit Group manufactures components for passenger transit vehicles, including subway cars and buses. The customers in this group are public transit authorities, leasing companies, and manufacturers of subway cars and buses. The two groups divided quite equally in terms of sales, with the majority of focus in the U.S. market. For fiscal year 2010, the top five customers of the company accounted for 18% of net sales.

Over the last 10 years, WAB has had very good profitability, with 9 out of 10 years of positive earnings, with the exception of a negative year in 2002. The result of negative net income in 2002 was because of cumulative effect adjustment in accounting standard for goodwill and intangible assets with indefinite lives. It would be less biased if we look into the operating income or the net income from continuing operation.

USD million 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Operating income 54 48 52 55 101 130 180 213 180 203
Net income cont. 14 18 22 32 58 86 109 131 115 123


The annual compounded growth rate is quite impressive at 14% and 24.3%, respectively, for operating income and net income from continuing operations. And over the years, the return from continuing operations on equity is in an increasing trend as well.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Cont. ROE 5.7% 9.0% 8.9% 10.3% 15.3% 18.3% 17.7% 20.3% 14.8% 13.7%


The cash flow situation of WAB was less impressive historically, but the CFO and FCF has been positive for all of 10 previous years. On average, the CFO stays at $112 million and the FCF is at $93 million.

Regarding financial strength, one of the growth and expansion strategies of WAB is acquisition. That is why we would expect to see a considerable amount of goodwill in its balance sheet. At the end of June 2011, goodwill took up 28.6% of the total assets. On the liabilities side, the large item is the long-term debt that the company, accounting for nearly 18% of the total assets, at $360 million. However, the cash flow from operations historically has been quite sufficient to cover the debts that the company has been taking, with the cash flow to debt ratios often hovering more than 40% for the last five or six years.

% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Cash flow to debt ratio 49.2% 8.2% 29.0% 35.1% 56.0% 100.7% 95.3% 41.1% 41.1% 41.7%


In terms of relative valuation with the industry average, WAB is a little bit overvalued and with its own historical valuation, it’s quite fairly valued. Historically, the share price alone has served the investors themselves pretty well, going from $12 in the beginning of 2002 to $53 currently, with the annual compound rate of 16%.

In short, with the impressive history in terms of profitability and the market share it is having, we can have high confidence of this trend will continue. Alongside with the profitability, WAB produces consistent positive CFO and FCF — enough to cover the interest-bearing debt that the company is taking. Of course, this company can’t be seen as a candidate for big jump in the short run, but with this current environment and current operation advantage, it is a stable stock to hold for the long term for patient investors.

[i]This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.[/b]

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


Rating: 4.6/5 (5 votes)

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