During much of fourth-quarter 2015, investor interest in Wabtec (Westinghouse Air Brake Technologies Corp.) has increased due to concerns about the North American railcar cycle, Wabtec’s pending acquisition of Faiveley Transport, the sustainability of margins and returns, and the company’s declining share price. Steve Barger of KeyBanc Capital Markets looked at revenue drivers and the Faiveley accretion model.
“While we think Wabtec’s story has become more intriguing given the recent share price pullback, at this time, we are maintaining our SW (Sector Weight) rating,” said Barger. “On a standalone basis we are decreasing our FY16 EPS estimate to $4.33 from $4.53. On a pro forma basis with Faiveley, we expect Wabtec could earn $4.30, albeit with lower operating margins and financial returns vs. recent years.”
Wabtec’s Freight segment has been the primary driver of strong results in recent years,” noted Barger. “From 2010-2015, the company’s Freight revenues and EBIT (earnings before interest and taxes) have grown at approximately 22% and approximately 32% CAGRs (compound annual growth rates), respectively, vs. its Transit sector at approximately 11% and 10%, respectively. Those growth disparities resulted in the Freight segment accounting for approximately 72% of incremental revenues and 86% of incremental EBIT over that time frame. We think Freight’s robust revenue and EBIT growth was driven by a strong North American railcar build cycle (38% CAGR over 2010-2015), higher aftermarket activity, rising PTC (Positive Train Control) [implementation], and acquisitions.”
Barger believes that the North American freight car cycle may be at cyclical peak. “Looking forward, we think there is a growing view that 2015 will be a cyclical peak for railcar builds, with some forecasts suggesting a 2016 build rate at the low- to mid-60,000 level following a 2015 build at the low-80,000 level,” he said. “Additionally, we think Wabtec’s aftermarket revenue could be challenged, given 2015’s decelerating rate of railcar loadings. To quantify, year-over-year through 50 weeks, total carloadings are down 5% year to date and down 9% on a trailing 12-week basis. Loadings excluding coal, grain and intermodal are down 3% YTD and 6% on a trailing 12-week basis. While we have less confidence in our ability to model PTC [implementation], we think peak North American locomotive installation could occur in 2016 and the domestic freight PTC spend will moderate after that. That confluence of events could cause the moderation or decline of Wabtec’s’s higher-margin Freight revenue growth rate over the next few years. In light of these factors, for FY16, we are forecasting a flat year for organic Freight revenue growth and, for Freight EBIT, we are modeling a 30 basis points decline to 22.8%.”
(Sources: Company reports, FactSet, KeyBanc Capital Markets Inc.)