Analysis of WABtech corporation

Investment Analysis Clubs Saul’s Investing Discussions
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Hi all, this is a company Saul already “found” and is invested in.
The following analysis is done for myself. However I hope it can be helpful to you and maybe even to Saul.
The conclusion of this analysis is clear:
This is an excellent company selling at a good price.
This is the kind of companies Buffett would buy.
Wishing you all good weekend and huge profits.
Shuki

WAB – Westinghouse Air Break (Wabtech analysis)
Lets take a look at 1YPEG of the last 2.5 years:
Q1 2013 1.44
Q2 2013 0.77
Q3 2013 0.76
Q4 2013 0.04 Q4 2013 1Y TTM 3.01
Q1 2014 0.83 Q1 2014 1Y TTM 2.4
Q2 2014 0.91 Q2 2014 1Y TTM 2.54
Q3 2014 0.93 Q3 2014 1Y TTM 2.71
Q4 2014 0.95 Q4 2014 1Y TTM 3.62
Q1 2015 0.99 Q1 2015 1Y TTM 3.78
Q2 2015 1.04 Q2 2015 1Y TTM 3.91
Q3 2015 1.02 Q3 2015 1Y TTM 4

Q4 2014 1YG 1.202657807
Q1 2015 1YG 1.575
Q2 2015 1YG 1.539370079
Q3 2015 1YG 1.47601476

We see healthy growth of between 20% and 47% and in the last three quarters of more than 47%.

The 1YPEG ratio is then
PE/1YG = 19/47 = 0.40
Indeed we see a sign here of growth for a reasonable price.

Lets look at the revenues of the last years:
Per Share Data Annuals (Year End) TTM Quarterly
Fiscal Period
Dec12 Dec13 Dec14 Sep15 Sep15

Revenue ($)
24.72 26.50 31.42 33.87 8.31
EBITDA
4.51 5.04 6.07 6.75 1.73
EBIT
4.05 4.52 5.44 6.09 1.56
Free Cashflow
2.08 2.01 4.38 4.60 1.36
EPS ($)
2.60 3.01 3.62 4.01 1.02
EPS (w/o Non-Recur. Items) ($)
2.60 3.02 3.63 4.01 1.02
Dividends
0.08 0.13 0.20 0.26 0.08
Book Value
13.38 16.53 18.77 20.52 20.52

Once again we see here a nice trend up.

Do the company have a strong business MOAT?
The company manufacture and sells to railroad industry. Mainly safety related equipment. They have more than 50% of the market. This kind of equipment must be very reliable and the railroad will not easily switch to a new vendor. They do have competitors but they are the dominant in the market. On top of that the number of competitors in only two. So the conclusion is Yes.

Look at the following:
Item Name 1 year 2 year 3 year 4 year 5 year 6 year 7 year 8 year 9 year 10 year
Equity 14.0% 19.0% 20.0% 19.1% 18.4% 18.7% 16.6% 18.3% 19.0%
EPS 20.3% 18.0% 27.2% 29.7% 24.7% 18.0% 18.3% 19.5% 22.3% 26.0%
Sales 18.6% 12.8% 15.7% 19.2% 16.8% 11.6% 12.2% 13.7% 12.8% 14.0%
Free Cash Flow 119.1% 45.4% 26.3% 28.7% 24.5% 20.3% 19.5% 16.0% 24.1% 28.7%
Cash From OA 100.5% 41.1% 23.9% 28.0% 23.8% 19.9% 18.7% 15.3% 21.1% 24.3%
ROIC 16.1% 16.1% 16.6% 12.3% 9.9% 10.5% 14.3% 16.1% 15.0% 12.4%
Gross Profit 22.5% 16.1% 18.0% 20.2% 18.9% 14.0% 14.2% 15.4% 15.3% 16.4%
Legend:
GOOD The value in a cell is not less than 10%
FAIR The value in a cell is between 8% and 10%
BAD The value in a cell is less than 8%

These are numbers that are the best as can be. It is indicative of a strong MOAT.

Does the company has a good and long growth projection?
From the 10K we have the following:
Deliveries of new locomotives were about 1,450 units in 2014, compared to about 1,300 in 2013 and the average of about 1,200 in the past 10 years. Deliveries of new freight cars were about 67,000 units in 2014, compared to about 53,000 in 2013 and the average of about 50,000 in the past 10 years.

https://www.wabtec.com/uploads/annual_report/2014WabtecAnnua…

It seems like there is an uptrend in locomotives and rail cars that is more business for WAB.
Also the analysts have an EPS long term projection of 15% for the next five years.

Inside Trading and Ownership:
Lately a director in the company bought $500000 worth of stocks in the company.

Risk Factors
Prolonged unfavorable economic and market conditions could adversely affect our business.
We are dependent upon key customers.
Our business operates in a highly competitive industry.
We intend to pursue acquisitions, joint ventures and alliances that involve a number of inherent risks, any of which may cause us not to realize anticipated benefits.
The above is from the 10 (K) every investment has risks. These are reasonable risks that could be taken. The management is good so loosing customers is not likely to happen. They have enough MOAT to overcome their competitors. The mitigation for unfavorable economic conditions is having an investment horizon of more than ten years.

Conclusion
WABtech is excellent company selling at a good price. I’ll be looking for buying it on a deep.

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I wish ‘the conclusion of this analysis is clear’ but for me, it is impossible to judge whether WAB is (as opposed to was) ‘an excellent company selling at a good price’. And while I agree that it is the kind of company Buffett would have bought, is it the kind of company he would buy? You may be right but the known unknowns are pretty serious. These mainly, of course, revolve around the question of ‘stranded assets’.

I reply because the other day I was looking longingly at UNP with exactly your thoughts in mind. I almost did it, with the intention of averaging down in tiny instalments for long-term vindication and success. But in the end, it went in what Buffett calls the ‘too difficult’ pile.

Perhaps it does not do so for Buffett himself! How interesting it will be to see and even more, if he, and you, then turn out to be right.

Apologies if I am departing from new rules in discussing a value stock here; that’s it, courteous quick reply to sender.

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I wish ‘the conclusion of this analysis is clear’ but for me, it is impossible to judge whether WAB is (as opposed to was) ‘an excellent company selling at a good price’. And while I agree that it is the kind of company Buffett would have bought, is it the kind of company he would buy? You may be right but the known unknowns are pretty serious. These mainly, of course, revolve around the question of ‘stranded assets’.

Thanks for the answer, can you elaborate a little bit more on this issue?
That would help me and others.
From the November summary letter it seems that Saul already has a position in this company.
Others might be following him too.

4

This is from Saul November summary letter:
These small positions are WAB which I held for a long time before, and sold when I thought it was too high, with too high a 1YPEG, but which has since fallen quite a bit in stock price so I reinitiated a position,

So Saul and most likely others are in WAB. It will be extremely helpful if you can elaborate more.

Thanks in advance!

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For me, the worry continues to be the overall train industry. For a number of years it grew really fast as more and more shale oil was extracted and transported over rail. Even with the demise of the XL pipeline, I don’t see growth going forward. I expect low oil prices for at least a year. Some drillers will go bankrupt and many wells shut down thanks to the draconian measures of the Saudis and others.

What do we see as the growth opportunities for WAB? New rail cars or lots of brake replacements on old cars? How likely?

Pete

P.S. Very nice work.

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http://seekingalpha.com/article/3727076-wabtec-expectations-…
Hi Pete, thanks for your complement. The best reward will be that we all make money out of this. From my experience this is one of these investments where you will not loose your money and that is a good start.

What do we see as the growth opportunities for WAB? New rail cars or lots of brake replacements on old cars? How likely?

According to the article (see a link above) there are three major factors.
One of them is a regulation that will mandate replacing breaks on a substantial amount of cars and locomotives. That suppose to boost profit and likely to happen, even though after the 2017 time frame.
The other big one is the Faiveley acquisition. With it they are not stranded to North America and to crude-by-rail.
Also Oil will come back, Emerging market slowdown will end eventually and commodities demand will increase again. With it the number of car loads.
It is the kind of situation where it is not if but when this will happen.

Summary

The Faiveley acquisition helps to further diversify the company away from North America and away from the crude-by-rail story.

Appeals to the ECP implementation required by the DOT is likely to push out the timeline for industry adoption.

The company has been focused on targeted acquisitions that help to decrease risk in the cyclical nature of the business.

Your concern is genuine, but both analysts and company indicates that there is much growth ahead.
Shuki

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Yes the problem is the future necessity for transport of fossil fuels given the amazing rise technology, efficiency and viability of renewables, and the increasing percentage of energy use they comprise.

The question is whether we are underestimating that. Coal is dead in the west, although WAB being international will certainly help. The future of oil is uncertain. The Paris talks about coercive government involvement sound serious for the first time. To what extent can the transport of other goods offset that?

And then there is the transport of people: can we predict trains-on-roads: strings of driverless coachpods, travelling at higher speed and lower cost than a railway?

This may all be nonsense, or decades too early. But it still puts railroads and WAB into the too difficult pile for me. Will be interesting to watch what happens with takeovers and mergers, like the one going on now.

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Yes the problem is the future necessity for transport of fossil fuels given the amazing rise technology, efficiency and viability of renewables, and the increasing percentage of energy use they comprise. The question is whether we are underestimating that.

Coal is dead in the Western World, although WAB being international will certainly help.

The future of oil is uncertain. The Paris talks about coercive government involvement sound serious for the first time. To what extent can the transport of other goods offset that?

And then there is the transport of people: can we predict trains-on-roads: strings of driverless coachpods, travelling at higher speed and lower cost than a railway?

This may all be decades too early. But it still puts railroads and WAB into the too difficult pile for me. Will be interesting to watch what happens with takeovers and mergers, like the one going on now.

Thanks steina, this was very interesting. The only thing I completely disagree with you on is the transport of people. I’ve ridden on the high speed trains in France, as well as the simple NY subways, and it seems to me that the transport of people will ALWAYS be cheaper, faster, and more reliable on trains than on cars or pods (no traffic lights, no traffic jams, routes that belong just to you, etc. We pity the people we see stuck in cars and can’t imagine why anyone would drive a car in the city when he or she could take the subway).

I’m not sure what that means for the future of WAB though, as what you say about coal and oil is inevitably true.

Saul

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http://www.investopedia.com/articles/stocks/11/primer-on-rai…

From that article:
Rail also offers compelling safety and efficiency advantages – accident rates are far lower for trains than trucks, and a train can move a ton of freight over 430 miles on a gallon of diesel (the average for all major U.S. railroads in 2007). Granted, these comparisons are not apples-to-apples, as there are so many more trucks on the road, most truck accidents are not the fault of truck driver, and the emissions standards are different for the two industries. Nevertheless, railroads are still a very relevant mode of transportation today, and are likely to remain so for the foreseeable future. (Investors can find profitable companies - even in a recession. It’s all about knowing where to look. See 4 Characteristics Of Recession-Proof Companies.)

It seems like trains are much safer and much more efficient than trucks. They will remain relevant.
Also from the little that I read intermodal transportation is being shifted to the rail roads.
Another factor that may need consideration is the new Panama Canal route that will allow wider and longer ships to go through the Canal.
So a ship from China shipping merchandise to the east coast doesn’t have to unload on the west coast and ship on the ground. That may work against west coast railroad carrier like BNSF and UNP.

But investing is never a clear cut there is always concerns. That is why WAB and the whole Rail Road industry is down a lot (more than 30%)
While the US Rail Roads are not cheap enough yet, WAB is cheap enough for me to take a closer look.

Of course that doesn’t guarantee that WAB will not get even cheaper.

Shuki

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Hi streina, you raise some valid macro concerns. As a result, I decided to dig deeper into the company quarterly reports. Here are the concerns you raised:

Yes the problem is the future necessity for transport of fossil fuels given the amazing rise technology, efficiency and viability of renewables, and the increasing percentage of energy use they comprise.

The question is whether we are underestimating that. Coal is dead in the west, although WAB being international will certainly help. The future of oil is uncertain. The Paris talks about coercive government involvement sound serious for the first time. To what extent can the transport of other goods offset that?

And then there is the transport of people: can we predict trains-on-roads: strings of driverless coachpods, travelling at higher speed and lower cost than a railway?

This may all be nonsense, or decades too early. But it still puts railroads and WAB into the too difficult pile for me. Will be interesting to watch what happens with takeovers and mergers, like the one going on now.

Here is what I found in the opening statement of the quarterly report:
http://seekingalpha.com/article/3594996-westinghouse-air-bra…

The Company Profits are still growing despite these macro headwinds:

We had a solid operating performance in the third quarter with sales of $810 million and earnings of $1.02 per diluted share, our second highest EPS number ever. With our operating margins, it continued to expand nicely and was at a record 18.8%. And we achieved these results despite a global economy that remains sluggish . So, the business is performing well, thanks to our diversified business model, our strategic growth initiatives and the power of our Wabtec Performance System. Although we share some of the short-term concerns of our customers in the U.S. and abroad, we continue to be optimistic and excited about the long-term opportunities in our key freight and transit rail markets. These markets are large and global and they will continue to grow over time. As they do, we are well-positioned to benefit from that .

The Faiverly Transport acquisition

The combined companies offer complementary geographies with minimal overlap. It offers diversified end-market offerings. It’s an extension of product and service capabilities of each company. We should see enhanced technology and innovation and initiative opportunities, an expanded relationship with blue-chip and global customers. In addition, we have significant synergies to help drive this growth. We expect the long-term annual synergies of at least €40 million to be achieved through supply chain efficiencies, operational efficiencies and cost savings, and leveraging the SG&A capabilities. Highly complementary geographic presence products and engineering services and activities do exist. Our combined global scale in freight and transit rail equipment market will help drive operational excellence. These synergies will improve our ability to offer safety, productivity and efficiency enhancements to the global rail markets. So, we are very excited about the future growth opportunities provided by this acquisition and we are working through the process to get it completed.

So WABtec is overcoming these macro trend and has a plan in tact to long term grow despite it.
Based an analyst consensus their long term five years growth is 15% per year.

Shuki

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On the transport of people, I imagine strings of hundreds of little driverless bubbles containing humans, about one inch apart from one another and travelling at speed. No traffic lights or traffic jams.

I fear the bureaucrats can’t wait to stop us driving. We must all enjoy driving powerful cars through the mountains at high speed while we can.

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One of them is a regulation that will mandate replacing breaks on a substantial amount of cars and locomotives. That suppose to boost profit and likely to happen, even though after the 2017 time frame.

so that is probably built into the stock.

The other big one is the Faiveley acquisition. With it they are not stranded to North America and to crude-by-rail.

There is certainly uncertainty with mergers and it could be a surprise either way.

Also Oil will come back, Emerging market slowdown will end eventually and commodities demand will increase again. With it the number of car loads.
It is the kind of situation where it is not if but when this will happen.

Ah, but it is the timing that counts. It will not be back next year. Maybe 2017, maybe not. Saudis are pissed about a lot of things. Russia has been selling to Asia, so now Saudis are undermining them in Europe by selling low. Saudis see shale oil as a threat and will not reduce their production in hopes that low prices will bankrupt many shale producers. Iran may come online in January and double its output. Meanwhile demand is growing very slowly.

Coal might be a surprise upside. As the US stops using it, the price will drop and I heard that China is licensing 4 coal plants a week. So much for their reduced carbon promises they made us. Someone has to ship that coal to China.

Trains will never be use for meaningful human transport in the US. We love our cars and they represent our independence. I will own a self driving car before train mass transit becomes meaningful and my car will efficiently zip down the road while I sleep on the way to my vacation :wink: In fact, I probably won’t own it, I will just reserve it and it will pick me up like a cab or Uber and when I get to my destination it will return to a POD somewhere waiting for the next user.

Still on the fence about WAB.

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Still on the fence about WAB.
No problem Peter, wishing you best of luck with whatever you decide to do.
Of course you are entitled to change your mind and buy it if you wish.
We are all here to help each other make money…

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