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

Seeking Alpha: Wabtec Is High-Priced And High-Quality In Equal Measure

Westinghouse Air Brake Technologies (NYSE:WAB), or Wabtec, is the sort of company that chronically only looks cheap in the rear view mirror. Wabtec has strong share in the relatively concentrated U.S. market for technologies and components that go into rail cars, locomotives, and transit cars/locomotives, and is moving to replicate that share overseas. Add in a willingness to acquire its way into new markets and an increasing mix of electronic components, and the basic market opportunity looks appealing.

Now, what do you want to pay for it? Wabtec already trades at more than 13x forward EBITDA and appears to price in mid-to-high teens annual FCF growth for the next decade. There's little argument that Wabtec is a leader in large markets and produces strong returns on capital, despite an aggressive ongoing M&A policy. For investors who can take a "don't worry, be happy" view on valuation and/or make a credible argument that Wabtec's growth rate will exceed that which is already implied in the valuation, Wabtec could still be a name to consider but value-focused investors may find it a harder case to make.

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Wabtec Is High-Priced And High-Quality In Equal Measure

Seeking Alpha: Wabtec Remains A Frustrating Mix Of Quality, Opportunity, And Expectations

Locomotive and train car components manufacturer Wabtec (WAB) has missed revenue expectations for four straight quarters, but it hasn't done any harm to the sentiment on the stock. These shares are up more than 60% for the past year and over 100% over the past two years, as investors continue to play their enthusiasm for a rail infrastructure build-out in the U.S. and the potential for Wabtec to replicate its "components on almost every car" market share in North America, in Europe and Asia.

Wabtec also remains a frustrating company to evaluate from a valuation perspective. If Wabtec could hold 20% overseas market share by 2023 in those areas, where it has roughly 50% share in North America, a fair value above $100 is definitely reasonable. On the other hand, these shares already trade with significant near-term expectations, and it could take more than a decade to build significant share in markets like Russia or China.

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Wabtec Remains A Frustrating Mix Of Quality, Opportunity, And Expectations

Seeking Alpha: Just How Far Can International Markets Take Wabtec?

Wabtec (WAB) is one of those uncommonly well-run industrial companies that just does not provide an investor with many opportunities to "buy the dip". Yes, there have been pullbacks along the way of 25% or so, but the company seldom looks cheap on conventional metrics.

On the other hand, here's a company with strong share in about 50% of its business, and a long record of generating high single-digit or double-digit revenue growth and improved operating margins in a cyclical industry. Although I don't want to get carried away with this bull market and a stock that is already up more than 50% over the past year, the argument for a fair value in the $70's doesn't seem ridiculous if you believe the company can replicate its success in North America in other parts of the world.

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Just How Far Can International Markets Take Wabtec?

Investopedia: WABCO's Quality Already Reflected In The Stock

Investors have gotten pretty skittish about vehicle part/component suppliers, even if quality companies overweighted towards commercial and/or emerging markets are getting an incremental premium. With good cash flow and solid (albeit erratic) returns on capital, WABCO (NYSE:WBC) stands out as a quality commercial vehicle original equipment manufacturers (OEM) supplier and unfortunately the stock reflects that.

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