Friday, December 14, 2012

A SWOT Analysis of Wabtec

Wabtec (NYSE: WAB) is the sort of stock that private investors should be all about. In short they make airbrakes and control systems for railcars. It’s not the sort of industry that will get hearts racing or brokers calling you over, but that is the good news! Who cares about being in the fashionable attention grabbing stocks? The idea is to make money and Wabtec has done that for you for the last 11 years in a row. And bar any sudden mishap it will do it again this year.

In a break from the norm, I thought it would be interesting to do a SWOT analysis on the firm.


  • Wabtec has very strong market positioning with only one major competitor (Faiveley SA) in its core market of railcar air brakes
  • Strong history of converting 125% of income into free cash flow
  • Consistent margin performance over the years
  • Essential product with good recurring revenues based on railcar usage
  • Well positioned in to benefit from Positive Train Control (PTC) legislation in the US
  • Solid multi-year contracts with customers gives good visibility of earnings
  • Intermodal traffic is growing the US
  • FedEx is reporting increased demand for freight services over its express offering in the US


  • The company is heavily exposed to one industry
  • Growth is somewhat dependent on political developments as railway infrastructure is subject to political risk
  • Cash flow conversion will be weaker with international growth as servicing overseas markets tend to require more working capital
  • Transit revenues are growing faster than freight and this can tend to lower margins
  • Subject to risk of any high profile failure in its products
  • Growth is somewhat subject to new transit car deliveries


  • Rail travel tends to be more energy efficient and Governments in developed economies will want to be supportive
  • Emerging market economies are keen to develop energy efficient transport intercity transport infrastructure and high speed rail
  • Transit rail is relatively scarce in the US but investment from Amtrak and others is increasing
  • Positive Train Control (PTC) revenues have risen from $125m last year to a forecast $200m with more growth expected next year
  • The rail industry is set for good long term growth as Governments look to support more energy efficient transport and Wabtec’s solutions are known for their quality
  • Shale Gas development is driving growth in certain types of freight


  • Global economy ultimately guides transportation volumes so Wabtec is not immune
  • End market investment is in rail is guided by Government led infrastructural spending and that is subject to political will
  • Decreasing coal car loads is hurting an area of demand for Wabtec
  • Wabtec is expanding in European markets where margins may be lower and internal competition more fierce


Essentially, the key points of the SWOT analysis are as above but, they need to be put in the context of Wabtec’s evaluation. The stock has had a great run this year, but I think it remains attractive. The key question is not so much about this year or the next, but rather how growth starts to look like when the “push” from PTC legislation starts to tail off before 2015.

Another issue will be the structural decline in coal transportation. Railroad companies like Norfolk Southern (NYSE: NSC) and CSX (NYSE: CSX) have both reported disappointing numbers recently and this is mainly due to coal. This weakness mirrors the carload numbers from coal issued by the Association of American Railroads. And less railcar loads usually means less transport miles and ultimately less aftermarket demand for products and services.

Moreover, geographic expansion brings with it the risk of margin erosion and greater working capital requirements. It also brings with it some uncertainty. China has not distinguished itself by demonstrating a willingness to “buy foreign” when it can produce its own technology as many foreign firms have found it.

 Nevertheless, long term prospects do look good for rail. General Electric (NYSE: GE) has been reporting strong growth in transportation revenues and expressing confidence over the willingness for infrastructural  investment to favor rail as a mode of freight and transit travel. This augurs well and Wabtec’s evaluation of 17x earnings does not look particularly expensive, especially when you consider that 125% of those earnings usually get converted into free cash flow.

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