Wabtec Stays On Fast Track Using Buyouts


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Wabtec Chief Executive Albert Neupaver likes to keep an active pipeline of acquisition candidates.

So, as a part ofWabtec 's ( WAB ) yearly strategic planning process, the company's 40 or so division managers provide a list of potential acquisition prospects.

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 told IBD.

"Into the future, if we want to stay on that growth path, we need to do about half of that growth from acquisitions," he said.

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 overhauls.

"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.

Critical Mass

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 Samuel Eisner.

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 million.

"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 cars.

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 via email.

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 12%.

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 hazards.

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 engines.

Old Locomotives

There's a big opportunity for Wabtec as old locomotives are overhauled and brought up to speed to meet these requirements, Neupaver says.

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 buys.

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas

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