Stock Report: Wabtec (WAB)

Takeaway: We added Wabtec to Investing Ideas on the short side on 9/11.

Stock Report: Wabtec (WAB) - zz WAB table 9 18 15


Capital equipment suppliers to a cyclical industry are usually more cyclical than their customers.   


We believe Wabtec was a beneficiary of both resources-related capital spending (international freight railroads) and the congestion of the U.S. rail system in 2014.  With rail speeds increasing and mining capex falling through the floor, those supports should gradually be removed from this richly-valued stock.


The end markets do not look promising for Wabtec. Freight car orders are coming off their all-time highs as backlog does the same per Railway Supply Institute data. Class 1 Railroads are curbing capex spending in the face of slowing freight volumes.  U.S. railroads are now putting equipment into storage.


Wabtec’s end markets are largely driven by its Freight business (75% of Operating Income), with the remainder going to its Transit business (passenger travel by rail).


In addition, the company is acquisitive. We believe that this "acquisitiveness" has been a key factor in its being miscategorized as a ‘growth’ industrial.  In our view, railroad parts was a growth industry back in the days of the robber barrons.  


Wabtec’s recent acquisition of Faiveley Transport indicates to us that both companies' management teams see trouble ahead.  Faiveley’s major customers are consolidating, while WAB may be looking for ways to maintain growth in a weaker Freight rail demand environment.


INTERMEDIATE TERM (TREND) (the next 3 months or more)


The lead time on major U.S. freight orders is quite short for Wabtec – well short of a full quarter.  The decline in expectations should come with the U.S. Freight rail capital budget guidance, which should come with 4Q2015 railroad earnings reports. 


LONG-TERM (TAIL) (the next 3 years or less)


By the time utilization has declined (amid peak equipment deliveries and stagnant traffic) it will be too late to exit/short Wabtec -- assuming we are correct. Investors should increasingly note a disconnect between weaker order rates versus expectations for continued robust earnings growth in 2016That would be a big problem for a 'growth' name with a high valuation. 


We see the set-up as analogous to Joy Global (JOY) and Caterpillar (CAT) back in 2012. 


Stock Report: Wabtec (WAB) - zz WAB chart 9 18 15

Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more

Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more