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Wabtec Corp

12/14/2015

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​Wabtec Corporation provides highly engineered, value-added products and services to freight rail, passenger transit and industrial customers throughout the world to assist them in increasing their safety, efficiency and productivity. Through its subsidiaries, the company manufactures a wide range of products for locomotives, freight cars and passenger transit vehicles, builds new commuter and switcher locomotives, and manufactures cooling systems and related equipment for the power generation and transmission industry. Wabtec Corp strives to combine practical innovations with the best in modern manufacturing and business practices to generate above average, long term returns for their shareholders. 


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Westinghouse Air Brake Technologies Corporation, doing business as Wabtec Corporation, provides technology-based products and services for the freight rail and passenger transit industries worldwide. It operates in two segments, Freight and Transit. The Freight segment manufactures and services components for new and existing locomotive and freight cars; supplies railway electronics and positive train control equipment; provides signal design and engineering services; builds switcher locomotives; rebuilds freight locomotives; and provides heat exchangers and cooling systems for rail and other industrial markets. This segment serves publicly traded railroads; leasing companies; manufacturers of original equipment, such as locomotives and freight cars; and utilities. The Transit segment manufactures and services components for new and existing passenger transit vehicles, including subway cars and buses; builds commuter locomotives; and refurbishes subway cars. This segment serves public transit authorities and municipalities, leasing companies, and manufacturers of subway cars and buses. The company’s products include positive train control equipment and electronically controlled pneumatic braking products; railway electronics, including event recorders, monitoring equipment, and end of train devices; freight car truck components; draft gears, couplers, and slack adjusters; air compressors and dryers; track and switch products; railway braking equipment and related components; friction products, including brake shoes and pads; door and window assemblies, and accessibility lifts and ramps for buses and subway cars; and traction motors. It also builds, remanufactures, and overhauls commuter and switcher locomotives, and transit cars. Westinghouse Air Brake Technologies Corporation was founded in 1869 and is headquartered in Wilmerding, Pennsylvania.

(Summary) (Company) (Chart)
13 December 2015
Price $70.12
1yr Target $94.92
Analysts 12
Dividend $0.32
Payout Ratio 8.02%

1yr Cap Gain 35.35%
Yield 0.45%

1yr Tot Return 35.80%
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EPS (ttm) $3.99
EPS next yr $4.48
EPS next 5yr 15.00%
1yr Price Support $67.20
P/E 17.57
PEG 1.17
Beta 1.31
Market Cap $6.77 Bil
Revenues $3.30 Bil
Earnings $388.30 Mil

Profit Margin 11.75%
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1yr EarnGR 20.26%
3
yr EarnGR 26.86%
5yr EarnGR 24.81%
1yr DivGR 51.72%
3yr DivGR 63.05%
5yr DivGR 61.53%
Quick Ratio 1.70
Current Ratio 2.50
Debt/Equity 0.23
ROA 14.80%

ROE 25.60%
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Earnings for 2015 are estimated to come in at $4.10 versus $3.62 in 2014 which is an increase of 13.25%. Estimates for 2016 are at $4.48 per share which is an increase of 9.26% over 2015. Dividends for the full year 2015 are expected to be $0.30 per share versus $0.22 per share in 2014. That's a dividend growth rate of 36.36% which, although slowing, is still a very healthy growth rate.
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Industry Overview

Wabtec Corp primarily serves the worldwide freight rail and passenger transit industries and as a result their operating results are largely dependent on the level of activity, financial condition and capital spending plans of the global railroad and transit industries. Many factors influence these industries, including general economic conditions, traffic volumes as measured by freight tonnage and passenger ridership, government spending on public transportation, and investment in new technologies by freight rail and passenger transit systems.

According to a recent study the accessible global market for railway products and services is more than $100 billion and it's expected to grow 2.7% annually through 2019. The three largest markets, which represent about 75% of the total market, are Europe, Asia-Pacific and North America. The study projects the overall market to remain stable through 2020 as emerging markets show above average growth due to increases in urbanization and increasing government support as developed markets slow. Overall growth in all major product segments, with rail control and services expected to grow the fastest, is expected to be 3% each.

It's estimated that the global installed base of locomotives is approximately 110,000 units, with about 35% in Asia-Pacific, 25% in Russia-CIS and 20% in North America. It's also estimated that the global installed base of freight cars is approximately 5.2 million units, with about 30% each in Russia-CIS and North America, and about 20% in Asia-Pacific. Finally the global installed base of transit cars is estimated to be 330,000 units, with about 55% in Asia-Pacific, about 20% in Europe and about 10% in Russia.

In North America, railroads carry about 40% of intercity freight, as measured by ton-miles, which is more than any other mode of transportation. They are an integral part of the continent’s economy and transportation system, serving nearly every industrial, wholesale and retail sector. Through direct ownership and operating partnerships, U.S. railroads are part of an integrated network that includes railroads in Canada and Mexico, forming what is regarded as the world’s most-efficient and lowest-cost freight rail service. The railroads carry a wide variety of commodities and goods, including coal, metals, minerals, chemicals, grain, and petroleum. These commodities represent about 55% of total rail carloadings, with intermodal carloads accounting for the rest. Intermodal traffic has been the railroads’ fastest growing market segment in the past 10 years. Railroads operate in a competitive environment, especially with the trucking industry, and are always seeking ways to improve safety, cost and reliability. New technologies offered by Wabtec Corp can provide some of these benefits. Demand for the company's freight related products and services in North America is driven by a number of factors, including rail traffic, and production of new locomotives and new freight cars. In 2014, the Association of American Railroads (“AAR”) reported total carloads increased 4.4% including a 5.4% increase in intermodal traffic. 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. 

In the U.S., the passenger transit industry is dependent largely on funding from federal, state and local governments, and from fare box revenues. The New York City region is the largest passenger transit market in the U.S., but most major cities also offer either rail or bus transit services. Demand for North American passenger transit products is driven by a number of factors, including government funding, deliveries of new subway cars and buses, and ridership. The U.S. federal government provides money to local transit authorities, primarily to fund the purchase of new equipment and infrastructure for their transit systems. In 2014, the U.S. Congress passed a bill that includes transit spending of about $11 billion in fiscal 2015, an increase of about 2%. The number of new transit cars delivered in 2014 was about 850, compared to about 1,000 in 2013. The number of new buses delivered in 2014 was about 4,600 compared to about the same in 2013. In the past 10 years, the average number of new transit cars delivered annually is about 800, and the average number of new buses delivered annually is about 4,700. Public transit ridership provides fare box revenues to transit authorities, which use these funds, along with state and local money, primarily for equipment and system maintenance. Based on preliminary figures from the American Public Transportation Association, ridership on U.S. transit vehicles increased about 0.9% in 2014.

Outside of North America, countries such as Australia, Brazil, China, India, Russia, and South Africa have been investing capital to expand and improve both their freight and passenger rail systems. Throughout the world, some government-owned railroads are being sold to private owners, who often look to improve the efficiency of the rail system by investing in new equipment and new technologies. According to studies, emerging markets are expected to grow at above-average rates as global trade creates increases in freight volumes and urbanization leads to increased demand for efficient mass-transportation systems. As this growth occurs, Wabtec expects to have additional opportunities to provide products and services in these markets.

In Europe, the majority of the rail system serves the passenger transit market, which is expected to continue growing as energy and environmental factors encourage investment in public mass transit. France, Germany, the United Kingdom and Italy are the largest transit markets, representing about two-thirds of passenger traffic in the European Union. Western European rail markets are expected to grow at about 2.0% in the next few years, with the United Kingdom and France expected to invest in new rolling stock. According to the UK’s Office of Rail Regulation, passenger rail usage has steadily increased in the past decade, with the Office reporting a 4.4% increase in second quarter ridership in its most recent quarterly report. Germany has the largest rail network in Europe. The largest freight markets in Europe are Germany, Poland and the United Kingdom. In the first nine months of 2014, The Federal Statistical Office of Germany reported a 0.8% increase in freight volumes compared to the same period in 2013. For the first nine months of 2014, SNCF (French national railway) reported an increase of 3.4% in revenue for local and regional ridership, and an increase of about 0.8% in freight-related revenue. It's estimated that the European rail market consists of about 11,000 locomotives, about 750,000 freight cars and about 72,000 passenger transit cars.

The Asia/Pacific market is now the second-largest geographic segment. This market consists primarily of China, India and Australia. Growth has been driven by the continued urbanization of China and India, and by investment in freight rail infrastructure to serve the mining and natural resources markets in those countries, as well as in Australia. It's estimated that this market consists of about 35,000 locomotives and about 1.0 million freight cars. China is expected to increase spending on rail infrastructure and equipment in 2015, as it resumes investment in high-speed rail programs. In its most recent report, the Indian government reported that in the first nine months of its fiscal 2014 freight rail traffic increased about 5.3% and passenger rail traffic decreased about 1.4%. India is expected to increase spending significantly in 2015 as it seeks to modernize its rail system.
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Other key geographic markets include Russia/CIS, South Africa, and Brazil. With about 1.5 million freight cars and about 28,000 locomotives, Russia/CIS is among the largest freight rail markets in the world, and it’s expected to invest significantly in new rolling stock and infrastructure. Russian Railways, a state-owned company, provides both freight and passenger transportation. South Africa, in 2012, announced a major program to invest in its freight rail and passenger transit infrastructure during the next 20 years. As part of this program, PRASA, the Passenger Rail Agency of South Africa, plans to purchase about 3,600 new transit cars and about 1,000 new locomotives. Brazil has also been investing in its passenger transport systems in advance of hosting the 2016 2016 Olympics. 

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Business Segments and Products

Wabtec Corp provides its products and services through two principal business segments, the Freight Segment and the Transit Segment, both of which have different market characteristics and business drivers.

The Freight Segment primarily manufactures and services components for new and existing locomotive and freight cars , supplies railway electronics, positive train control equipment, signal design and engineering services, builds switcher locomotives, rebuilds freight locomotives and provides heat exchangers and cooling systems for rail and other industrial markets. Customers include large, publicly traded railroads, leasing companies, manufacturers of original equipment such as locomotives and freight cars, and utilities.  In 2014, the Freight Segment accounted for 57% of total sales, with about 75% of sales in North America and the remainder to international customers. In 2014, slightly more than half of the Freight Segment’s sales were in aftermarket.

The Transit Segment primarily manufactures and services components for new and existing passenger transit vehicles, typically subway cars and buses, builds new commuter locomotives and refurbishes subway cars. Customers include public transit authorities and municipalities, leasing companies, and manufacturers of subway cars and buses around the world. As discussed above, demand in the transit market is primarily driven by government funding at all levels and passenger ridership. In 2014, the Transit Segment accounted for 43% of the company's total sales, with about 45% of its sales in North America and the remainder to international customers. About two-thirds of the Transit Segment’s sales are in the aftermarket with the remainder in the original equipment market.

The following is a summary of the company's leading product lines in both aftermarket and original equipment across both business segments:


Specialty Products & Electronics:
  • Positive Train Control equipment and electronically controlled pneumatic braking products
  • Railway electronics, including event recorders, monitoring equipment and end of train devices
  • Signal design and engineering services
  • Freight car truck components
  • Draft gears, couplers and slack adjusters
  • Air compressors and dryers
  • Heat exchangers and cooling products for locomotives and power generation equipment
  • Track and switch products
Brake Products:
  • Railway braking equipment and related components for Freight and Transit applications
  • Friction products, including brake shoes and pads
Remanufacturing, Overhaul and Build:
  • New commuter and switcher locomotives
  • Transit car and locomotive overhaul and refurbishment
Transit Products:
  • Door and window assemblies for buses and subway cars
  • Accessibility lifts and ramps for buses and subway cars
  • Traction motors

Wabtec Corp has become a leader in the rail industry by capitalizing on the strength of their existing products, technological capabilities and new product innovation, and by their ability to harden products to protect them from severe conditions, including extreme temperatures and high-vibration environments. Supported by 1,200 engineers and specialists, Wabtec has extensive experience in a broad range of product lines, which enables them to provide comprehensive, systems-based solutions for their customers.
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During the last few years Wabtec has introduced several significant new products, including electronic braking equipment and train control equipment that encompasses onboard digital data and global positioning communication protocols. In 2007 the FRA (Federal Railroad Administration) approved the use of their Electronic Train Management System, which offers safety benefits to the rail industry. In 2008 the U.S. enacted a rail safety bill that mandates the use of Positive Train Control (“PTC”) technology, which includes on-board locomotive computer and related software, on a majority of the locomotives and track in the U.S. With Wabtec's Electronic Train Management System, the company is the leading supplier of onboard train control equipment and they are working with the U.S. Class I railroads, commuter rail authorities and other industry suppliers to implement this technology throughout the rail network. In 2014, Wabtec recorded about $290 million of revenue from freight and transit PTC projects. 
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Recent Acquisitions and Joint Ventures

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Wabtec has recently completed several significant acquisitions in support of its growth strategies:
  • In February 2015, the Company acquired Railroad Controls L.P., a U.S. based provider of railway signal construction services for a purchase price of approximately $63.7 million.
  • In September 2014, the Company acquired C2CE Pty Ltd., a leading provider of railway signal design services in Australia, for a purchase price of approximately $25.1 million.
  • In August 2014, the Company acquired Dia-Frag, a leading manufacturer of friction products in Brazil, for a purchase price of approximately $70.6 million.
  • In June 2014, the Company acquired Fandstan Electric Group Ltd., a leading rail and industrial equipment manufacturer for a variety of markets, including rail and tram transportation, industrial and energy, for a purchase price of approximately $199.4 million.
  • In September 2013, the Company acquired Longwood Industries, Inc, a manufacturer of specialty rubber products for transportation, oil and gas, and industrial markets, for a purchase price of approximately $83.9 million. 
  • In July 2013, the Company acquired Turbonetics Holdings, Inc, a manufacturer of turbochargers and related components for various industrial markets, for a purchase price of approximately $23.2 million.
  • In January 2013, the Company acquired Napier Turbochargers Ltd., a UK-based provider of turbochargers and related parts for the worldwide power generation and marine markets, for a purchase price of approximately $112.3 million. ​

​My Perspective


This company has a great history dating back over 100 years, so its the kind of company that can survive and prosper in a variety of economic scenarios. Today the company is growing its revenues, earnings and dividends at a very nice pace and by all estimates this should continue into the near future, if not for years to come. I like the fact that it has a lot more assets than liabilities and very little debt. In fact I like almost everything about this company except for they very small dividend. Management is growing the dividend at a very fast paste but I think this company could easily payout more than 8% of its earnings. They could easily triple the payout ratio and therefore triple the dividend without affecting the overall balance sheet.

I expect to start a position in this company in the near future as funds become available. This company has fallen from above $100 per share to today's price near $70. I can't find anything in the fundamentals that would support that kind of fall so I can only imagine the pullback was a result of the fall in the price of commodities which is affecting overall railroad traffic. If that's the case, rail service companies should eventually separate from the major rail companies and Wabtec Corp should not have a problem hitting its target price of $94 per share in the next 12-15 months.​
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    I am an Individual Investor with specific interest in long term growth and then enhancing my returns with income from dividends and derivatives. I don't recommend stocks to anyone (it's a good way to lose friends) and no one reading this should misinterpret my blog as a recommendation for any type of investment. I am writing this solely for myself and my kids.


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