Wabtec's Tactical Moves Promise Robust Growth And Global Expansion

Key Takeaways

• Strong second-quarter sales and earnings growth, driven by the Freight segment and margin expansion, suggest the company's financial strength may be underappreciated.
  
• Significant investments in international markets and technological innovations, like the Green Friction braking solution, forecast sustained revenue growth and improved profitability.
  
• Geopolitical risks, operational challenges, regulatory shifts, and uncertain market dynamics pose significant threats to Wabtec's efficiency, demand for products, and financial performance.

Catalysts

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

• The robust sales and earnings per share growth in the second quarter, driven by strong performance from the Freight segment and margin expansion, could indicate underappreciation of the company’s financial strength and operational efficiency, potentially impacting future revenue and net margins positively.
  
• A $600 million multiyear order for new Tier 4 locomotives in North America showcases strong demand for Wabtec’s products and innovation. This large order not only demonstrates the underlying strength and future revenue streams but also highlights the company’s ability to meet evolving regulatory and environmental standards, influencing future earnings.
  
• Significant investments in international markets to expand and upgrade infrastructure, supporting a robust international orders pipeline. This diversification and expansion into new geographies are likely to contribute to sustained revenue growth and margin expansion internationally.
  
• The focus on technological innovations, such as the Green Friction braking solution ready for commercial fleet operations, indicates a forward-looking approach to addressing global trends like urbanization and decarbonization. These innovations are expected to open new revenue streams and improve profitability through differentiated, high-demand products.
  
• Integration 2.0 and portfolio optimization initiatives aimed at streamlining operations and reducing manufacturing complexity are expected to result in substantial cost savings by 2025. This focus on operational efficiency is likely to improve net margins and enhance shareholder value through increased earnings per share.

Assumptions

• Analysts are assuming Westinghouse Air Brake Technologies's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.9% today to 14.6% in 3 years time.
• Analysts expect earnings to reach $1.7 billion (and earnings per share of $9.08) by about August 2027, up from $1.0 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 20.8x on those 2027 earnings, down from 27.8x today. This future PE is lower than the current PE for the US Machinery industry at 21.3x.
• Analysts expect the number of shares outstanding to decline by 2.2% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.91%, as per the Simply Wall St company report.

Risks

• The reliance on significant international orders, such as the one in Pakistan and collaborations in Brazil, presents a geopolitical and economic risk that can affect the company's order fulfillment and revenue.
  
• A shift in manufacturing production to balance across quarters aims to improve efficiency but might lead to unanticipated operational challenges impacting margins if production cannot be scaled as planned.
  
• The decarbonization trend and urbanization driving the Transit segment is contingent on continued public and political support. Any shift in regulatory priorities could impact demand for Wabtec's products, thereby affecting sales growth.
  
• The company's strategic focus on portfolio optimization and Integration 2.0 for operational streamlining and cost savings may lead to short-term disruption and costs that could impact net margins.
  
• Market dynamics such as the variation in North American carload growth and active fleet size indicate an uncertain demand environment, potentially impacting sales and earnings if market conditions deteriorate.

Valuation

• The analysts have a consensus price target of $181.64 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 $231.0, and the most bearish reporting a price target of just $136.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $11.9 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 20.8x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $160.97, the analyst's price target of $181.64 is 11.4% 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.