- Wabtec improved its fundamentals through a good balance of organic and non-organic means.
- Wabtec sits on an excellent balance sheet.
- Global infrastructure investment will serve as a catalyst for long-term growth.
On Feb. 20, railroad parts, service and equipment company, Westinghouse Air Brake Technologies or Wabtec for short (NYSE: NYSE:WAB), came out with its 2014 annual 10-K which follows up on its earnings announcement released on Feb. 18 in more detail. The company had an excellent year.
In 2014, Wabtec's revenue, net income, and free cash flow all expanded 19%, 20%, and 112% respectively year over year. On top of that, the company sports an excellent balance sheet. Its $426 million in cash equated to 24% of stockholder's equity. I love seeing companies with cash amounting to 20% or more of stockholder's equity to get them through rough times. Wabtec manages its long-term debt well. Despite increasing its long-term debt 16% year over year, its long-term debt to equity ratio still came in at 29% in 2014 vs. 28% in 2013. Let's take a look to see what lies behind these rock-solid fundamentals.
A good balance
I always like to see an improvement in a company's fundamentals due to a strong demand for its products, followed by non-organic means such as price increases and acquisitions in order of personal preference. Wabtec struck a near-perfect balance between increased demand and acquisitions. Strong demand in Wabtec's freight and transit segment contributed $269 million or 56% of the overall increase in revenue in 2014. Acquisitions contributed $229.4 million or 48% of Wabtec's overall growth in revenue in 2014.
Growth in revenue outpaced the growth in expenses, contributing to net income and margin expansion. In 2014, Wabtec's operating margins clocked in at 17.3% vs. 17% in 2013. Net profit margins came in at 11.6% in 2014 vs. 11.4% in 2013. Timely customer collections as well as favorable changes in operating assets and liabilities contributed heavily to Wabtec's free cash flow expansion.
Thoughts on the future
Wabtec sells needed parts and service to a crucial industry - the railroad. The need for global society to efficiently move goods from point A to point B will most certainly serve as a catalyst for superior long-term capital gains and dividend increases for years to come. Interestingly, company management hinted in the earnings announcement that ongoing global rail and transit infrastructure investment will contribute to robust revenue and profitability growth in FY 2015 and beyond. Dramatically, Wabtec's management issued guidance of $4.05 per share on a diluted basis for 2015. If Wabtec's current P/E ratio of 27 holds, this equates to roughly $109 per share, representing a 12% rise from its current stock price of around $97 per share as of this writing.
Shares are getting expensive
Wabtec's robust business model and the resulting fundamentals haven't gone unnoticed by Wall Street. According to Morningstar, the company trades at a P/E ratio of 27 vs. 18 for the S&P 500 and 21 for Wabtec's five-year average. At this point, I am cautiously bullish on the company. Investors may want to take a small position while adding during that inevitable market correction. As I have said before, this company deserves a long-term spot in your portfolio.
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