Weak Freight And Iffy Organic Growth Remain Issues For Wabtec

Wabtec (NYSE:WAB) runs a business model that has long relied on serial M&A and that is not going to change. What has changed, though, is that the company's key North American freight rail market has weakened considerably and is likely to stay in the doldrums for some time. That puts even more pressure on management to execute on the opportunities available in growing the transit business, growing its freight business outside North America, and continuing to execute on margins.

Not many businesses generate steady double-digit ROIC, and for all of the (valid) concerns about Wabtec's reliance on M&A, I think that detail should not be ignored. What's more, even amid a sharp downturn in its freight business, margins have remained quite solid. If management can execute on long-term opportunities in transit and freight, particularly overseas, there is enough potential business out there to support a higher fair value for the stock.

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Weak Freight And Iffy Organic Growth Remain Issues For Wabtec

Seeking Alpha: Wabtec Pivoting Away From Freight Weakness, But At A Price

The overall weakness in industrial and machinery markets has undermined a lot of stocks that were once bulletproof (or nearly so), and Wabtec (NYSE:WAB) has gotten caught up in that as well. The shares have lost almost 30% of their value since the last time I profiled the company, as investors have grown more and more concerned about the growing weakness in the North American freight rail sector and the potential margin consequences of the expensive takeover of France's Faiveley (OTC:FVLTY).

I have more than a few concerns about the price Wabtec is paying to acquire a business that has only very rarely posted double-digit FCF margins or returns on capital. I freely allow that financial ratios don't always capture the full picture and value of a business, but overpaying for M&A is a time-tested means of destroying shareholder value.

That said, I understand why Wabtec is pursuing the deal, as larger exposure to the international transit rail market seems like a reasonable move to make today. Wabtec's shares could still merit a fair value in the high $80s if you believe the company will eventually grab significant share of the international freight and transit markets. Keep in mind, though, that that has been the story for a while now, and the company's progress in organic terms hasn't really helped support it all that much.

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Wabtec Pivoting Away From Freight Weakness, But At A Price