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Wabtec Struggling With Weak Freight Demand And Poor Operating Leverage

Stephen Simpson profile picture
Stephen Simpson


  • Wabtec continues to suffer the impact of major changes in the North American rail freight market, including dramatically lower locomotive demand and high levels of stacked equipment.
  • Transit is looking better from a growth perspective, but management needs to maximize the margin potential of this business to really take advantage.
  • Wabtec may be washed out from a sentiment perspective, and I can see a path to a $100 share price in 2023, but investors will need to be patient.

When I last wrote about Wabtec (NYSE:WAB), my call was a pretty tepid “neutral”, as although I saw some undervaluation in the shares, I didn’t have much confidence in the rail freight outlook, nor in management’s ability to drive internal outperformance. Since then, the shares have risen about 5%, more or less tracking the S&P 500, but lagging the Dow Jones Transportation Average by about 10%.

Unfortunately, I still don’t see many reasons to be positive in the short term. Rail freight is shaping up poorly for Wabtec in 2021, with virtually no demand for new locomotives, inadequate demand for locomotive overhauls, and weak freight car build rates, and while the outlook for transport is brighter, it’s a lower-margin business.

I can respect the idea of buying into stocks at the point of “maximum pessimism”, and maybe Wabtec is near that point. Likewise, I can see Wabtec as a $100 stock in 2023, but investors are going to need some patience here.

Freight Continuing To Struggle

There were some glimmers of hope in the fourth quarter of 2020 as rail freight carload traffic started to improve, but it didn’t really deliver any benefits to Wabtec.

Freight revenue declined 20% in the fourth quarter (to $1.3B), contributing to a 3% miss in Freight revenue for Wabtec and the eighth straight quarter of declines. Basically everything was bad, as equipment sales declined 32%, digital electronics sales were down 22% (the second straight quarter of declines), and service revenue was down 4%. With poor overhead absorption, segment profits dropped 31%, with margin falling 250bp to 16.3%.

I don’t believe that Wabtec is losing meaningful share in the market, but rather that the market has changed in ways that are bad for Wabtec. For starters, precision scheduled railroading has led to dramatically reduced locomotives in service, as railroads

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor.Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds).

Analyst’s 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (8)

TJRyan profile picture
The way this market is going I take it's a buy now.....
Pillpoppinpuppy profile picture
It's too bad this company had to be botched up by acquiring GET, in my opinion. It was an attractive asset but the WAB shareholders go robbed, in my opinion. What a travesty. Just think where we could be had that not happened.
Rail traffic down 26 percent yoy. AAR.gov.. Wabtec is known as GETS junior. Same old GETS management same old stupid s##t. Same old financial engineering. Train companies not sending in engines for overhauls. No new engines for US customers. Only for export. Egypt and India financial disaster because of engine failures. Wabtec losing money on deal warranty issues. Sell Wabtec.
Pillpoppinpuppy profile picture
@landaxe12 Carloads increased by 2.5% y/y and improved 25.8% sequentially in Week 8. Intermodal increased the most y/y in the week (up 14%) followed by Agricultural Products (up 9.5%). So I don't see the 26% decline you are referring to and your web site reference doesn't help unless one is willing to pay to subscribe.

On warranties, WAB paid $131 MM in warranties in 2020, up from $1118 MM in 2019, or by 11%. In contrast, revenue fell by 8%. So that does seem to be an issue. However, we are talking about payments totaling 1.7% of total revenue in 2020 vs. 1.4% in 2019.
Old Professor profile picture
In layman's language, what, exactly, does "washed out from a sentiment perspective" mean, please?
Pillpoppinpuppy profile picture
@Old Professor I think it means that so many investors have been disgusted by the lack of execution that there aren't many people left to be disgusted.
Old Professor profile picture
@Pillpoppinpuppy Thank you. I like your way with words. 😀
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