Sell Wabtec: The Beginning Of A Much Bigger Unwind?

| About: Westinghouse Air (WAB)


Wabtec shares are down -8% this week after missing fourth quarter earnings and offering weak 2017 guidance.

Wabtec is entering a major down cycle in rail equipment that's historically hurt its profitability.

Cost cutting measures and acquisitions won't be enough to plug the profitability gap.

It's another bad day for Wabtec (NYSE:WAB) investors.

The stock took a tumble yesterday after the $6.7 billion rail equipment manufacturer missed Wall Street analyst earnings estimates. Full-year 2017 guidance came in a little light too. The company expects earnings in the range of $3.95 to $4.15 per share.

The bleeding in Wabtec shares extended into Wednesday trading. Shares are already down -8.5% so far this week.

This is only the beginning of a much bigger unwinding, writes Hedgeye Industrials analyst Jay Van Sciver in a recent research note. "The release makes it clear that management has now lost the ability to spin the cyclical downturn… we think it is still early in the WAB unwind," he says.

"For a management team that has gained the faith of investors by always delivering," Van Sciver continues, "the quarter and initial guidance represent a significant challenge."

He has been bearish on the stock for some time now. His thesis has long been that Wabtec is in the midst of a cyclical downturn that has historically been really detrimental to the company's margins.

Van Sciver hosted an institutional call in December 2016 to refresh his thesis. After a major investment cycle in rail equipment, over the last ten-plus years, the industry is slowing explains Van Sciver in the video below from that research call. Back in 2007, the average age of private railcar equipment was more than 20 years old. Today the average age is about 13 years old.

"What we're seeing is a major down cycle and historically that has tended to crush Wabtec's margins," Van Sciver says. "We're looking at the youngest railcar fleet of the post-war period," he says. "That's big. This is no minor cycle."

Wabtec has tried to plug the gap with the acquisition of French rail company Faiveley but it won't be enough to save Wabtec, Van Sciver says. European transit rail is coming off its own investment cycle, after deregulation and other factors led to substantial investment, he says.

In other words, Wabtec has been dodging this cyclical downturn in its core business for some time through cost cutting and acquisitions. As reality gets priced-in, this may be just the beginning of the pain for shareholders. We say stay away from this one.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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