Digital And Decarbonization Initiatives Will Strengthen Future Position In Rail Industry

Key Takeaways

• Strong international market and strategic partnerships are set to drive revenue growth and improve sales stability.
  
• Focus on digital solutions and Integration 2.0 initiative enhances high-margin potential and net margin improvement.
  
• Financial headwinds from declining Services sales and currency volatility may challenge revenue and margins, despite strategic shifts and portfolio optimization efforts.

Catalysts

Provides technology-based locomotives, equipment, systems, and services for the freight rail and passenger transit industries worldwide.

• The international market demand is strong, with significant investments in infrastructure and the strongest locomotive order pipeline in five years, which could drive revenue growth.
  
• The strategic MOU with Kazakhstan and finalized orders signal robust future sales, contributing positively to Wabtec's revenue stream.
  
• The company is focusing on digital and decarbonization solutions, aligning with regulatory push, which can support margin expansion as these are higher-margin business segments.
  
• Wabtec's Integration 2.0 initiative is expected to yield $75 million to $90 million in run-rate savings by 2025, which will improve net margins.
  
• The robust 12-month and multiyear backlog provides visibility and confidence in future earnings, with growth expected at a mid-single-digit rate, leveraging backlog conversion for revenue stability.

Westinghouse Air Brake Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Westinghouse Air Brake Technologies's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.3% today to 14.2% in 3 years time.
• Analysts expect earnings to reach $1.8 billion (and earnings per share of $10.39) by about January 2028, up from $1.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.5x on those 2028 earnings, down from 31.3x today. This future PE is greater than the current PE for the US Machinery industry at 23.0x.
• Analysts expect the number of shares outstanding to decline by 1.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.02%, as per the Simply Wall St company report.

Westinghouse Air Brake Technologies Future Earnings Per Share Growth

Risks

• North American railcar build is projected to be down 9% from last year, which could impact revenue growth in that region.
  
• The company anticipates significant mix headwinds in Q4 due to the reverse timing of high-margin Services and lower-margin Equipment Group sales, potentially affecting net margins.
  
• Foreign currency exchange has been a headwind to revenue, gross profit, and operating margin, which could pose risks to overall earnings if currency volatility continues.
  
• Expected double-digit decrease in Services sales in Q4 could impact overall revenue, particularly if the Equipment Group does not compensate with equivalent growth.
  
• Integration 2.0 and portfolio optimization projects may lead to a reduction of $110 million in low-margin, nonstrategic revenue, impacting short-term revenue levels during the transition period.

Valuation

• The analysts have a consensus price target of $216.01 for Westinghouse Air Brake Technologies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $243.0, and the most bearish reporting a price target of just $182.12.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $12.4 billion, earnings will come to $1.8 billion, and it would be trading on a PE ratio of 25.5x, assuming you use a discount rate of 7.0%.
• Given the current share price of $189.14, the analyst's price target of $216.01 is 12.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.