Description
Wabtec stock provides an exceptional value play. Wabtec (1) has a market
dominant position, (2) generates a large amount of free cash flow, (3)
trades at a low p/e, (4) has eps potential 200 percent higher than current
levels, (5) has just announced a sizable transaction that will be eps
accretive, and (6) is run by a strong management team that owns 25 percent
of the equity.
Wabtec provides products and services for the rail industry. Wabtec also
builds locomotives, and provides after market services. The company has
about $1 billion in annual revenues. It's number one in the marketplace in all of its product categories. Approximately 70 percent of sales are for replacement products. Check the most recent 10-k for a more detailed company description.
The investment thesis is as follows: At present railroads' profits are
sagging. As a result, railroads have been cutting capex levels dramatically.
On average, capex spending is down 50 percent from a "peak" level and 25
percent from a "mid cycle." year. Railroads are mothballing railcars and
stripping them for parts that are then used to service the remainder of the
fleet. Obviously, this will stop at some point (best guess now is 1st half
2003). When it does, wabtec will earn $125 million more in ebitda and an
additional $2 per share in earnings.
At present, even in this trough market, Wabtec is a cash cow. Prior to the announcement of the recent transaction, Wabtec was going to use its free cash flow of $100 million to repay debt and repurchase shares. Let me put this in the context of the current valuation. Wabtec has about $470 million of debt and an equity market capitalization of $490 million. At a market capitalization of $960 million, Wabtec trades at 1x 2001 sales, 6x 2001 ebitda, and 15x 2001 eps. Wabtec is carrying about 25 cents eps in goodwill amortization so that its stock currently trades about 12x 2001 cash eps.
Relatively speaking, $100 million in free cash flow given the size of this company and its current valuation is large. In fact, if the $100 million was spent on reducing 9% debt with a 42% tax rate, eps would grow by the current p/e. You don’t need any top line growth to justify the current p/e. Free cash flow generation can deliver double digit eps growth. And remember, in a boom year, free cash flow will be 100% higher.
Three weeks ago, Wabtec announced the sale of assets to GE Transportation Systems. These assets primarily include locomotive aftermarket products and services for which Wabtec is NOT the original equipment manufacturer. The purchase price was $240 million. These assets generated $180 million in revenues and $18 million in ebitda. Cash proceeds of $200 million will retire debt. This transaction will leave Wabtec with less than $250 million of debt at year end 2001. Run rate ebitda post sale will be about $140 million. So, once this deal closes, this company is trading close to 5x ebitda………5x trough ebitda.
This stock has historically traded as high as $30 before the acquisition of MotivePower. Wabtec has the ability to generate $280+ million in ebitda in a “good” year. That’s at least $2.50 per share. At 10x multiple = at $25 stock. At 15x multiple = $37.50. 6x “good year” ebitda = a $33 stock.
To recap…..WABTEC is a stock that has potential to at least double within 2 years. Downside is limited due to its free cash flow and low current valuation. The stock is followed by several wall street analysts. The best one is the CSFB analyst. He has it rated a buy….but don’t hold that against this stock.
Catalyst
Recent transaction coupled with lots of free cash flow that can be used to delever and repurchase shares will lead to eps growth. When cycle turns, eps will increase by 200% over current levels. Management owns 25% of stock and may attempt to sell company at a price 2x current levels. In the past, CEO has held "informative" talks with GE. If a deal happens, that's a bonus. Only count on EPS growth for sure.