At the start of 2022, I believed that shares of Westinghouse Air Brake Technologies Corporation (NYSE:WAB) aka Wabtec were not leaving the station, with the 2021 recovery in the wake of the pandemic not looking very strong. This left me with some doubts on the operating execution, as a solid share price performance resulted in a full valuation.
What followed was a resilient performance in 2022 and solid outlook for 2023, all while Wabtec keeps scoring orders and actually announces some bolt-on deals well, making me continually upbeat on the shares in the long haul, although many of these rosy prospects are priced in already.
A Railroad Giant
Wabtec’s investment thesis is dominated by the purchase of GE Transportation in 2019, a huge deal with the deal tag surpassing Wabtec’s own valuation at the time. The deal was set to create a business with $7.8 billion in sales, $1.2 billion in EBIT, and earnings of around $4 per share, with synergies having the potential to boost this number to $5 per share.
Originally guiding for $8.7 billion in sales and earnings between $4.50 and $4.80 per share in 2020, that guidance could be thrown out of the window following the outbreak of the pandemic. As it turned out, sales actually fell to $7.5 billion, although a $3.79 earnings per share number was relatively strong in this environment.
The 2021 guidance was a bit underwhelming with sales seen at $7.6-$7.9 billion and earnings around $4.10 per share, as a somewhat better performance and dealmaking efforts meant that the company hiked the guidance to $8.0 billion in sales and earnings of $4.25 per share alongside the third quarter earnings report. Net debt of $3.6 billion was very reasonable and manageable at 2.5 times EBITDA.
With Wabtec trading at $97 at the start of 2022, I believed that a 22-23 times multiple felt a bit rich, amidst a somewhat softer operational performance, making me happy to trim some of my position if shares would surpass the $100 mark.
Trading Largely Stagnant
With shares trading in an $80-$110 range ever since, little excitement has been seen in the case of Wabtec, although shares trade at the higher end of the guidance currently, trading at $112 to be more precise.
Earlier this year, the company reported 2022 sales with revenues having grown to nearly $8.4 billion, aided by inflationary pressures, although that operating margins rose by nearly a point, driven by a recovery in sales and realization of synergies related to the GE deal. GAAP earnings rose by fifty cents to $3.46 per share, with adjusted earnings reported up to $4.86 per share. Net debt of $3.5 billion ticked down a bit, not a major concern here with some money earmarked for share buybacks.
Moreover, the company guided for resilient numbers in 2023, with sales seen up to $8.7-$9.0 billion, with earnings seen between $5.15 and $5.55 per share.
In April, the company posted a rather spectacular 14% increase in first quarter sales, to $2.2 billion, with adjusted earnings per share up by similar percentages to $1.28 per share. Net debt ticked up to $3.7 billion, and while the company maintained the full year guidance, there definitely seems room towards the upside here. The 180 million shares now award the company a $20.2 billion valuation at $112 per share, or about $24 billion if net debt is included. This values equity at around 20 times earnings, and the business at nearly 3 times sales.
In June, the company announced its next bolt-on acquisition. Being equal to 1% of the enterprise valuation, Wabtec announced the purchase of L&M Radiator in a $230 million deal. L&M provides heavy-duty equipment radiators and heat exchangers and will be added to the mining portfolio. Unfortunately, no financial details were announced, other than that the deal will be immediate accretive and synergies will be seen as well over time.
Upbeat Guidance
Pegging earnings power at $5.50 per share this year, shares trade at a relative full 20 times earnings multiple. On the other hand is that leverage is relatively manageable, even though it will tick up to $4.0 billion on a pro forma basis, equal to about 2.5 times EBITDA.
While the near term results are nothing too spectacular, growth can and likely will be driven by a massive replacement cycle in the coming years. Not only is railroad equipment quite old, it needs massive upgrades as well related to safety (as became so painfully evident earlier this year) but notably green initiatives as well, boding well for companies like Wabtec.
Given this, I believe that the long-term Westinghouse Air Brake Technologies Corporation growth trajectory is more than intact, although that current valuations still look rather full, leaving me a happy holder of Wabtec shares, but seeing no reason to alter this position.
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