Wabtec's Better-Than-Expected Performance Has Shrunk Some Of The Fear Discount

Once a Wall Street darling, Wabtec (WAB) had lost a lot of that luster, as the company’s expensive foray into transit via the Faiveley acquisition hadn’t really produced the hoped-for benefits and investors worried about the size, quality, and growth potential of the large GE Transportation deal, particularly with the looming changes in how Class 1 rails operate. While those concerns were, and are, valid, the shares have managed to modestly outperform the S&P 500 since my last update, with better-than-expected execution apparently easing some of the fear discount.

The company’s revenue outlook remains challenging, with near-term pressures from weak rail traffic growth and stacked locomotives and uncertain share growth potential in international markets. Margins are looking stronger, though, and I think Wabtec is on pace to get to mid-teens FCFs margins a little sooner than I’d previously expected (three, possibly four years, earlier). With the shares offering okay appreciation potential on discounted cash flow and seemingly undervalued on the basis of margins and returns, this is still a name worth considering for 2020 given the overhang of uncertainty if not outright skepticism.

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Wabtec's Better-Than-Expected Performance Has Shrunk Some Of The Fear Discount