Integration 30 And International Demand Will Support Future Success

Key Takeaways

• Strong international demand in key markets and infrastructure investments are expected to drive revenue growth and enhance profit margins.
  
• New locomotives, modernization projects, and digital intelligence opportunities could boost revenue, while financial strategies enhance EPS and signal market confidence.
  
• Declining North American railcar builds and volatile revenue streams present risks, while international reliance and cost management challenges may impact future financial performance.

Catalysts

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

• Wabtec's Integration 3.0 and portfolio optimization are expected to support over 350 basis points of margin improvement over the next five years, which is anticipated to enhance net margins and contribute to EPS growth.
  
• The company anticipates strong international demand in core markets like Latin America, Africa, and Asia, with significant investments in infrastructure support, potentially driving revenue growth.
  
• Wabtec has a robust pipeline for new locomotives and modernization projects, which could underpin high single-digit growth in North America, positively impacting revenues.
  
• The company's digital intelligence segment demonstrated strong international orders and had significant opportunities for growth in automation and signaling solutions, likely to bolster revenue and profit margins.
  
• Wabtec's financial strategy includes a $1 billion share repurchase authorization and a 25% increase in dividends, which can enhance EPS through reduced share count and signal financial confidence to the market.

Westinghouse Air Brake Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Westinghouse Air Brake Technologies's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.1% today to 14.7% in 3 years time.
• Analysts expect earnings to reach $1.8 billion (and earnings per share of $10.8) by about March 2028, up from $1.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.3x on those 2028 earnings, down from 30.8x today. This future PE is greater than the current PE for the US Machinery industry at 21.4x.
• Analysts expect the number of shares outstanding to decline by 3.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.45%, as per the Simply Wall St company report.

Westinghouse Air Brake Technologies Future Earnings Per Share Growth

Risks

• The expected decline in North American railcar builds in 2025, down nearly 17%, could negatively impact future revenues and overall financial performance as it reflects a reduced demand for new railcars.
  
• The 15.9% drop in Services sales during Q4, attributed to the timing of modernizations and overhauls, highlights potential volatility in revenue streams, especially if this trend continues into future quarters.
  
• Despite strong international markets, the reliance on international growth means Wabtec is susceptible to geopolitical issues and regional economic variations, which can have unforeseen impacts on revenue and net margins.
  
• The softness in the North American Digital Intelligence business, driven by lower discretionary OpEx spending and commuter signaling, suggests a risk of underperformance in this segment, affecting earnings growth potential.
  
• Wabtec’s extensive cost-management efforts, such as Integration 3.0 and continuous improvement initiatives, indicate potential difficulties in maintaining or improving margins if cost savings cannot offset inflation or if these initiatives encounter execution challenges.

Valuation

• The analysts have a consensus price target of $215.124 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 $240.0, and the most bearish reporting a price target of just $186.24.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $12.1 billion, earnings will come to $1.8 billion, and it would be trading on a PE ratio of 23.3x, assuming you use a discount rate of 7.4%.
• Given the current share price of $189.6, the analyst price target of $215.12 is 11.9% 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.