At GuruFocus there are pre-defined screens for finding value stocks. Using the “Peter Lynch + Warren Buffet” screen yields 5 results. WABCO Holdings Inc (WBC) is the stock with the smallest market cap. I chose the stock with the smallest market cap because I am looking for a stock with more room to grow. Use the screen to see the remaining results.
So far WABCO is good enough Warren Buffet, and it passes the Peter Lynch screen. The stock has also gone up nearly 60 percent in the past year. Is there more room for it to grow?
The Company
WABCO is a leading provider of electronic, mechanical and mechatronic products for the world’s leading commercial truck, trailer, bus and passenger car manufacturers. They manufacture and sell control systems, including advanced braking, stability, suspension, transmission control and air compressing and pressing systems that improve vehicle performance and safety and reduce overall vehicle operating costs. It is estimated that their products are in two out of every three commercial vehicles with advanced vehicle control systems and offered in sophisticated, niche applications in cars and sport utility vehicles. The company continues to grow in more parts of the world and provides more components and systems throughout the life of the vehicle, from design and development to the aftermarket.
WABCO was founded in the United States in 1869 as Westinghouse Air Brake Company. It was purchased by American Standard in 1968 and operated as the Vehicle Control Systems business division until it was spun-off in 2007. The company is now headquartered in Brussels. The Wabtec Corporation is a separate company that is still headquartered in Wilmerding, PA.
Competitors
The principal competitors are Knorr-Bremse (Knorr’s U.S. Subsidiary is Bendix Commercial Vehicle Systems) and, in certain categories, Haldex. In the advanced electronics categories, automotive players such as Bosch and Continental have recently been present in some commercial vehicle applications. In mechanical product categories, several Asian competitors are emerging, primarily in China, who are focused on such products.
Financial Statements
WABCO scores an 8/10 for profitability and growth. Since the company was spun-off in 2007, revenues have gone from $2.416 billion to $2.721 billion, only a 12.6 percent overall increase. The spin-off occurred at the height of the previous cycle and revenues quickly dropped in 2009. Year over year revenues are up about 10 percent. Operating margins have been flat to slightly down over the past three years. Earnings per share (EPS) have increased to $10.31 per share in 2013 from $4.62 per share in 2012. Excluding extraordinary items, EPS has increased to $5.01 2013 from $4.46 in 2012, a 12.3 percent increase.
WABCO scores a 9/10 for financial strength and has an Altman Z-Score of 6.38 indicating a safe level of debt. The company has $528 million in cash, cash equivalents, and marketable securities while only having $47 million in long-term debt. It has enough operating earnings to covering its interest expense 165.95 times. WABCO does have a large pension liability of $439 million, but there is enough cash to cover it. The company has been buying back shares since 2011. The number of shares outstanding has decreased by 8.9 percent since then.
Risks
The main risk factors are the cyclicality of the industry and the concentration of their business in Europe. Demand for new trucks and busses have a significant on their sales. In 2013 heavy truck and bus production remained relatively flat year on year in Europe, their largest market which accounted for 61 percent of their sales.
| WABCO SALES | ||
| By Geography | FY 2013 % of Sales | FY 2012 % of Sales |
| Europe | 61 | 60 |
| Asia | 18 | 20 |
| North America | 11 | 11 |
| South America | 7 | 6 |
| Other | 3 | 3 |
Goldman Sachs believes the current cycle is moving in a positive direction. The company recently upgraded WABCO to a “conviction buy” earlier in April. S&P Capital IQ gives a positive outlook for the next twelve months for the farm machinery and heavy-trucks sub-industry. The Euro Zone economy is starting to expand after having negative GDP growth for 2012 and 2013.
Valuation
At face value, the stock looks cheap due to its P/E of 10.50, but the P/E needs to be adjusted for extraordinary items. The largest item is an EC fine reimbursement of $279.5 million. The company stated that its performance EPS for 2013 was $5.01. With an adjusted EPS, the adjusted P/E is 21.74. Warren Buffett (Trades, Portfolio) started purchasing the stock in the third quarter of 2012. The P/E based on performance EPS was between 12.5 and 14.5 when he was purchasing the stock. The stock has nearly double since then. Given the recent run in the stock, I think the margin of safety has been removed. The stock is fairly valued at its current price of $108.89. There are 12 analysts covering WABCO, and the average estimate is for earnings to grow at about 15 percent in 2014 and 19 percent in 2015. Using the GuruFocus Reverse DCF Calculator with the adjusted EPS, WABCO would need to grow its earnings at a rate 15.91 percent annually to be fairly valued at its current price. WABCO is a great company with little competition and the backing of Warren Buffett (Trades, Portfolio), but a pullback in price would be needed in order for it to be a bargain at its current valuation. The stock has a beta of 1.9, so it can outperform the S&P 500 in an upward trending market, but not without the added risk. With the adjusted P/E, WABCO would not have passed the screen.
