Here's Why Wabtec Belongs In Your Portfolio
Summary
- Investing in the stock market represents the best route for an individual to become independently wealthy.
- Buy companies that sit behind a wide moat and sell highly needed or wanted products.
- Westinghouse Airbrakes Technologies sells needed parts and services in a crucial industry.
I love researching the stock market and have done so for 23 years since my sophomore year of high school. Also, I am fascinated by the fact that the stock market represents the best route to wealth for the individual. According to the website Moneychimp.com the stock market as a whole has given investors a compounded annual return of roughly 9% since 1871 when factoring in dividends.
During my time as a stock market researcher I have developed some principles to help me select publicly traded businesses to hold for the long-term. Let's take a look and see how one of my investment favorites, Westinghouse Air Brake Technologies or Wabtec for short (NYSE: NYSE:WAB), is doing.
Think like a business owner
I buy shares in publicly traded businesses with the intention of holding for decades. I don't like the word stock. I just view the stock market as a way to buy shares in excellent businesses and when the time does eventually come to sell then I can use that mechanism to sell those shares to someone else. Holding for the long-term can cut down on trading costs and taxes if held in a taxable account. In order to achieve this you need to buy companies that stand the best possible chance of growing and expanding. The stock market generally rewards companies that can expand their fundamentals over the long-term in the form of superior capital gains and dividend increases.
In order to achieve long-term fundamental expansion, a company needs to sell a needed or a highly wanted product with the former bearing less risk than the latter. It also helps if the company resides in a market leadership position, operates in an industry with high barriers to entry, and has a highly recognizable brand.
I also like to see companies grow in the following ways in order of preference: volume (amount of product moved), price increases and acquisitions that fit a company's core competency.
Of course not all of these attributes need to be present in order for a company to be successful over the long-term, but investors need to evaluate businesses with these qualities in mind. Any business owner would want his/her products to be in demand and they wouldn't want competitors to eat into their profitability.
Wabtec represents a good company that falls under these attributes. The company sells highly needed parts and services in the rail transportation industry which serves a crucial role in society. The company holds a 50% market share in North America, meaning that it resides in a position of market leadership, at least in the United States.
Earnings power
Companies with the above attributes will demonstrate "earning power". The father of security analysis, Benjamin Graham, had this to say about earnings power in the third edition of Security Analysis:
"The concept of earning power has a definite and important place in investment theory. It combines a statement of actual earnings, shown over a period of years, with a reasonable expectation that these will be approximated in the future, unless extraordinary conditions supervene. The record must cover a number of years, first because a continued or repeated performance is always more impressive than a single occurrence, and secondly because the average of a fairly long period will tend to absorb and equalize the distorting influences of the business cycle".
Over the past five years Wabtec has grown its revenue, net income, and free cash flow 109%, 195% and 105% respectively (see charts below). In other words Wabtec has doubled its revenue and free cash flow and tripled its net income during that time. The growth is especially consistent with its revenue and net income during that time. Moreover the company did this through a balanced combination of volume, pricing and strategic acquisitions. This company demonstrated earnings and free cash flow power.
WAB Revenue (TTM) data by YCharts
As a result of its excellent fundamentals, Wabtec's shareholders experienced a total return of 344% vs. 106% for the total return of the S&P 500 (see chart below).
WAB Total Return Price data by YCharts
Saving for hard times
In just about every article I write, I do a brief analysis of a company's balance sheet. As a publicly traded business owner I want my company to be fortified for hard times, be able to take advantage of buying businesses that could fortify my product portfolio and provide cash for a sustainable dividend payment. I don't want my profitability and cash flow drowned out by interest expense generated by long-term debt. I want companies to have a cash and liquid investment balance equating to better than 20% of stockholder's equity and long-term debt equating to 50% or less of stockholder's equity.
Given the fact that the balance sheet only represents a one day snap shot of a company's financial picture those figures could change quickly. A company probably builds up cash for the snapshot making the cash to stockholder's equity figure higher for the proverbial photo shoot while paying vendors and employees in the interim and depleting cash to a lower level. This is why I set the bar so high for cash. The 50% figure for long-term debt to equity is a personal cutoff that I prefer to use.
In its most recent snapshot Wabtec came up a little short on the balance sheet front. Wabtec's cash to stockholder's equity came in at 12% of stockholder's equity according to its most recent balance sheet. However, long-term debt came in at just 29% of stockholder's equity. Wabtec possesses a reasonable cash stash approaching my benchmark and a long-term debt level that is far enough below my high mark to make this acceptable.
Dividend sustainability
I also look for companies that pay out less than 50% of their free cash flow in dividends so that they can use the remaining free cash flow for reinvestment back into the business. As you can see in the table below Wabtec has exercised prudence in its dividend policy over the past five years.
Wabtec | |||||
Year | 2009 | 2010 | 2011 | 2012 | 2013 |
Dividend to free cash flow | 1.4% | 1.3% | 1.9% | 4.0% | 6.7% |
Source: Morningstar and author's calculations
Currently, Wabtec pays its shareholders $0.24 per share per year and yields 0.3% annually.
Is the price right?
In an ideal market environment a business owner will pay as little as possible for ownership interest in a company. There are many ways to determine whether or not a company is cheap or expensive. I prefer to keep it simple here and look mainly at the P/E ratio. I like to buy a company trading at a P/E ratio that resides below the comparable P/E of the S&P 500 as a whole. Frankly, most of the time this is difficult and I usually pay up for quality companies. If the company's stock price corrects then I buy more. Wabtec is currently trading at a P/E ratio of 25 vs. 19 for the S&P 500 as a whole. On a forward basis it trades at a P/E ratio of 20 vs. 17 for the S&P 500.
Conclusion
Westinghouse Air Brakes deserves a long-term spot in your portfolio. I don't think Wabtec is going to go anywhere anytime soon due to the crucial nature of its products and services. Hopefully this will translate into superior capital gains and dividend increases over the long-term. According to Yahoo! Finance, analysts estimate Wabtec will report earnings per share of $3.61 later this month and $4.16 for FY 2015. Assuming that its P/E ratio of 25 holds that gives the company a share price of $90.25 and $104.00 respectively translating into an estimated return of 7% and 23% respectively based on the share price of $84.65 as of this writing.
This article was written by
Analyst’s Disclosure: The author is long WAB. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (8)
Enterprising Graham investment requires minimum ratings of - N/A, 75%, 90%, 50%, 5%, N/A and 137%.Wabtec Inc - Graham Ratings
Sales | Size (100% ⇒ $500 Million): 514.00%
Current Assets ÷ [2 x Current Liabilities]: 115.03%
Net Current Assets ÷ Long Term Debt: 167.36%
Earnings Stability (100% ⇒ 10 Years): 100.00%
Dividend Record (100% ⇒ 20 Years): 95.00%
Earnings Growth (100% ⇒ 30% Growth): 312.71%
Graham Number ÷ Previous Close: 36.92%The Final Graham Assessment for Wabtec Inc is also given below.
The Quantitative Result (Intrinsic Value ÷ Previous Close) for a stock has to be 100% for true Graham investment.Wabtec Inc - Final Graham Assessment
Defensive Price (Graham Number): $31.25
Enterprising Price (Serenity Number): $12.70
NCAV Price: $1.00
Qualitative Result: Good / Enterprising
Intrinsic Value: $12.70
Previous Close: $84.65
Quantitative Result: 15.00%Since this is an Enterprising quality stock, the Intrinsic Value of this stock equals its Enterprising Price.
Similarly, the Intrinsic Value for a Defensive quality stock equals its Defensive Price (Graham Number), and the Intrinsic Value for an NCAV quality stock equals its NCAV Price.Please note that not all stocks failing Graham's rules are necessarily bad investments. Graham's rules are just extremely selective. Graham designed and backtested his framework for over 50 years, to deliver the best possible long-term results.http://seekingalpha.co... shows how one can assess 5000+ NYSE and NASDAQ stocks by a similar exact Benjamin Graham assessment, with no adjustments other than those for inflation.