Wabtec Chief Executive Albert Neupaver likes to keep an active
pipeline of acquisition candidates.
So, as a part ofWabtec 's (
) yearly strategic planning process, the company's 40 or so
division managers provide a list of potential acquisition
The strategy has helped Neupaver and his team as they've
revved up the rail and transit equipment supplier's business with
a steady flow of acquisitions.
Wabtec has done more than 20 acquisitions since 2005, and
they've accounted for roughly half of Wabtec's growth over the
last seven years, during which time sales have doubled, Neupaver
"Into the future, if we want to stay on that growth path, we
need to do about half of that growth from acquisitions," he
To help meet that goal, Wabtec has made four acquisitions so
far this year. Its latest buy, announced Oct. 2, was the $48
million purchase of LH Group, a U.K-based provider of maintenance
and overhaul services for the passenger transit market. LH has
annual sales of roughly $65 million. Wabtec expects the
transaction to be accretive in the first year.
The buy is a good fit, says Neupaver. Wabtec has built a large
aftermarket presence in the U.K. with its Wabtec Rail unit that
overhauls and refurbishes passenger transit vehicles, and its
Brush Traction unit that provides services such as locomotive
"LH complements and strengthens our aftermarket presence by
enabling us to offer complete overhaul service for a variety of
transit vehicles and components," Neupaver said in a statement in
announcing the buy.
The acquisition boosted Wabtec's critical mass in the U.K. and
gave it a bigger foothold in Europe, which has the largest rail
transit market in the world, says William Blair & Co. analyst
Eisner says the LH buy fits into management's focus to up its
presence in the European transit and aftermarket as the company
is relatively underpenetrated in the European market.
But Wabtec has been moving on the fast track with its current
lineup. It's logged nine straight quarters of double-digit profit
growth. Sales have increased at that rate in all but one quarter
over that time.
If followers are on target, it will show it kept up the pace
when it reports third-quarter results before the opening bell
Tuesday. Analysts polled by Thomson Reuters expect earnings to
rise 34% to $1.29 a share. They see sales rising 19% to $595.11
"All told, I feel comfortable with the company's business in
the third quarter," Eisner said.
He says Wabtec's earnings likely will be in line or slightly
better than consensus. But, he adds, most investors, including
him, expect a deceleration in revenue growth for its freight arm,
which accounted for 61% of revenue in 2011.
The freight unit makes and services components for freight
cars and locomotives, builds new switcher locomotives and
rebuilds freight locomotives and specialty products such as
railway electronics like event recorders and positive train
control, or PTC, equipment.
Eisner says the deceleration in the freight arm's growth rate
is due to strong comparisons and robust railcar deliveries during
the first half of 2012.
The expected slowdown in the segment follows a cyclical upturn
in railcar builds, Eisner says.
"That being said, management constantly has an eye on
profitability," he adds. "So while growth rates might slow on the
top line, I'm still positive on solid incremental margins, being
able to push earnings per share higher due to cost containment
and benefits from lean manufacturing."
He says Wabtec should have revenue growth in the second half
from the transit arm due to executing on its backlog.
The transit segment makes and services components for
passenger transit vehicles, typically subway cars and buses,
builds new commuter locomotives and refurbishes subway cars. It
also builds new commuter locomotives and refurbishes subway
Neupaver says there's a lot of activity in the transit area on
a global basis, especially in emerging countries like China that
are building new high speed rails and other transit systems.
In the U.S., the climate for Wabtec's business is mixed.
For the transit market, ridership in the U.S. is up 3.3%
year-to-date, vs. a year ago, said Wabtec spokesman Tim Wesley
Year to date, carloads for U.S. freight railroads are down
2.5% vs. a year earlier, while intermodal, moving trailers and
containers by a combination of rail and truck are up 3.6%, he
said, citing data from the Association of American Railroads, or
AAR. The main reason for the decrease in carloads this year is
that coal is down 10% and that represents about 40% of total
carloads, Wesley said. If you exclude coal from the mix, traffic
is actually up 3% .
Of the 20 categories the AAR reports each week, 11 are up so
far this year, led by petroleum products, which is up 43% vs. a
year earlier. Motor vehicles are up 19%, and lumber is up
Meanwhile, Wabtec should get a nice boost from its PTC
equipment. PTC is a GPS safety-based technology capable of
preventing train-to-train collisions, derailments and other
The Rail Safety Improvement Act of 2008 mandates the
installation of PTC, which includes on-board locomotive computer
and related software, on a majority of the locomotives and track
in the U.S. by the end of 2015.
Wabtec is the leading supplier of this on-board train control
equipment, according to a company filing with the SEC.
Eisner says the company has indicated it should get about $200
million from PTC-related revenue in 2012 and that it should grow
further in 2013.
Wabtec also makes products that help meet the U.S.
Environmental Protection Agency's Tier 4 emission standards
required to be met by 2015. The standards call for the reduction
in particulate matter and nitrous oxide emissions from diesel
There's a big opportunity for Wabtec as old locomotives are
overhauled and brought up to speed to meet these requirements,
Wabtec has gotten a number of contracts on this front.
Recently, in August, it signed a $45 million contract with
Metrolinx, an agency of the province of Ontario and the regional
transportation authority for the Greater Toronto and Hamilton
Area to repower 11 locomotives with new engines and propulsion
systems that meet significantly higher environmental standards.
Deliveries are expected to begin in 2014.
Meanwhile, Neupaver and his team are on the prowl for more
They're looking for companies that make a good strategic fit.
Plus, Wabtec management aims to improve the company's business by
applying its knowledge and capabilities, says Neupaver.
Wabtec is focused on buying companies that help it expand
globally and offer new technology Wabtec doesn't have.
Analysts polled by Thomson Reuters expect Wabtec to stay on a
solid growth path. They see full-year 2012 earnings rising 40% to
$5.17 a share. They forecast a 12% increase in 2013.