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WAB | Anxious, Are We?

Takeaway:  Wabtec’s repurchase seems to reflect anxiety about its sagging share price.  Perhaps the Faiveley family is getting antsy about their discount to public holders. For long-term holders who liked the old Wabtec strategy, we do not see how a change in capital allocation is a positive signal. 

 

 

Choking on Good Burgundy

 

There are a few odd and noteworthy aspects of the buyback announced today.  First, it is utterly uncharacteristic for WAB.  Wabtec has had an acquisition driven growth strategy, and the 4Q15 buyback is much larger than the cumulative net buybacks over the last decade.  It is a major change in capital allocation, and one may limit post-Faiveley acquisition flexibility.  

 

Second, with the Faiveley deal closing expected at some point in 2016, cash is precious.  As we see it, WAB will need to come up with about $1 billion to close, with about $200 million of that currently in escrow.  The $365 million spent on the repurchase might have been put to better use, limiting the amount of debt that would be needed to fund the transaction. 

 

Finally, Faiveley’s public holders can elect Euro 100 per share, while the family is stuck taking 75% of their compensation in a fixed 1.125 ratio of WAB equity that has devalued since the deal was announced.  The family would be selling shares at – depending where one marks a WAB three-year mandatory convertible preferred of dubious liquidity – a 25% to 30% discount to public holders.  Is the Faiveley family finding that a bit hard to swallow, and perhaps pushing for revised terms?

 

 

Some Other Questions

  • Why change the capital allocation strategy?  The share price was at 4Q15 average levels through most of 2014 without a large buyback, so it is unlikely that management was attracted to the exceptional value.
  • Is the buyback a signal that business is great, and management wants to demonstrate confidence?  That seems a pretty clear, ‘no’.  We know that US Freight Rail equipment is going into storage, orders for new equipment are down, and that the international freight market is not robust. Backlogged orders may support activity in early 2016, but we do not believe that Wabtec management is highly optimistic about their market outlook.
  • Does WAB just want to add additional leverage, not recognizing that this is likely the peak of the rail capital spending cycle?  We hope so.  In fairness, Wabtec has probably been underleveraged; that will change with the buyback & Faiveley merger.
  • Did the company want a lower share count to improve headline EPS guidance? Perhaps, but the market has not responded well to simplistic financial engineering of late.
  • Did the Faiveley family press the company to do something about its sagging share price?  That doesn’t seem out of the question.  If you were the Faiveley family, would you want to receive less than the public holders?

 

We may be asking the wrong question, but Wabtec management seemed to want a higher share price in the fourth quarter.  For long-term holders who liked the old Wabtec strategy, we do not see how a change in capital allocation strategy is a good signal.


REPLAY: Healthcare Updates You Can’t Afford To Miss & Live Q&A

Our Healthcare team, Tom Tobin and Andrew Freedman, was back in the studio today at 12:15pm ET for another Healthcare Q&A with an opportunity for you to ask your questions live.

 

They had key updates on a wide range of companies they cover, including HCA Holdings (HCA), AMN Healthcare Services (AHS), Athenahealth (ATHN), Mednax (MD), Medidata Solutions (MDSO), Zimmer Biomet (ZBH), and Hologic (HOLX).

 

 


Cartoon of the Day: Rising Or Setting?

Cartoon of the Day: Rising Or Setting? - Abenomics cartoon 02.10.2016

 

"What happens when they move to infinity-bailout (Bank of Japan) and the market no longer trusts them?" Hedgeye CEO Keith McCullough wrote earlier today in a note to subscribers. "Japan's Prime Minister Shinzo Abe was forced to say 'I trust BOJ Governor Kuroda' overnight as neither the FX nor Nikkei does (the Yen hit new year-to-date high = Nikkei down another -2.3%)."


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JT Taylor: Trump Trounces, Kasich & Bush Surge & Clinton Flounders

Takeaway: Key takeaways from the New Hampshire primary.

Editor's Note: Below is a brief excerpt from Potomac Research Group Senior Analyst JT Taylor's Morning Bullets sent to institutional clients each morning. 

TRUMP TROUNCES:

JT Taylor: Trump Trounces, Kasich & Bush Surge & Clinton Flounders - trump 55

 

On the heels of criticism that his lack of campaign infrastructure in Iowa led to his loss to Ted Cruz, Donald Trump didn't take any chances in NH. He ramped up his organization in just a 10-day stretch to augment his strong polling numbers -- with volunteers making over 30,000 calls a day and maximizing GOTV efforts. Just think if he'd had all this in place before Iowa... Expect Trump to bring in more ground forces into South Carolina where he faces a well-organized Jeb Bush and an electorate that's partial to Cruz.  

NEW LIFE FOR KASICH AND BUSH:

JT Taylor: Trump Trounces, Kasich & Bush Surge & Clinton Flounders - jeb

 

Seems like just yesterday (ahem) that media pundits were speculating that some of the top-tier candidates would have to consider dropping out after NH. Not so fast. John Kasich's strong second place finish will infuse badly needed resources into his campaign, and Bush's resurgence will inject much-needed confidence into his. Kasich will need to quickly capitalize on his momentum and improve his 1% standing in SC, but we don't see a path forward for him.  Bush needs to place big in both SC and Nevada in his renewed fight to win the establishment lane.

SANDERS SURGES, CLINTON PURGES:

JT Taylor: Trump Trounces, Kasich & Bush Surge & Clinton Flounders - sanders

 

There was never a doubt that the Bern would win NH, he's been leading Hillary Clinton by 15-20 points since last fall. We're not even that surprised by the margin, but by the fact that she couldn't close the gap despite winning the state in 2008, a full court press this past week, and inability to make inroads in any of the key demographics. Sanders' numbers across the board were stunning and one stands out more than the others -- he won over women by 11% and commanded 83% of 18-29 years olds.

 

Clinton will do what stumbling campaigns almost always do -- call for an overhaul.  But we don't think her campaign needs to hit the reset button. She does. It's her lack of a clear message and conviction -- and as a result Sanders is tapping into the constituencies that should naturally be hers. The demographics in the next two states and Super Tuesday favor her with a more diverse electorate and a ground game that has been in the place since early 2015. But Sanders isn't going away any time soon. More money will flow his way and he will look to dent her March strategy, where 56% of delegates are up for grabs.


FINANCIALS SENTIMENT SCOREBOARD - TOLL BROTHERS (TOL)

Takeaway: Today we're flagging Toll Brothers (TOL) on the short side due its extremely bullish sentiment (Score: 90).

Our top-down view on the US Housing market changed from bullish to bearish at the start of the year and we think the high end is likely to soften materially in 1H16. At the other end of the housing spectrum is KB Home (KBH) at a bombed out sentiment score of 10. Though left for dead, we think the news will continue to get worse over the intermediate term so we'd hold off for now. That said, given the score, it's not a name where we'd be pressing the short right here. 

 

We are publishing our updated Hedgeye Financials Sentiment Scoreboard in conjunction with the release of the latest short interest data last night. Our Scoreboard now evaluates over 300 companies across the Financials complex.

 

The Scoreboard combines buyside and sell-side sentiment measures. It standardizes those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. Our analysis shows that a contrarian strategy can be employed successfully by taking the other side of stocks with extreme readings in sentiment, either bullish or bearish. Once sentiment reaches these extreme levels, it becomes a very asymmetric setup wherein expectations become too high or too low.  

 

We’ve quantified the tipping points for high and low sentiment. Specifically, we've found that scores of 20 or lower have a positive, average expected return while scores of 90 or greater are more likely to underperform.

 

Specifically, our backtest of 10,400 observations over a 10-year period found that stocks with scores of 0-10 went on to produce an average absolute return of +23.9% over the following 12-month period. Scores of 10-20 produced an average absolute return of +11.9%. At the other end of the spectrum, stocks with sentiment scores of 90-100 produced average negative absolute returns of -10.3% over the following 12-months.

 

The first table below breaks the 300 companies into a few major categories and ranks all the components on a relative basis. The second table breaks the group into smaller subsectors and again gives them relative rankings within those subsectors. 

 

FINANCIALS SENTIMENT SCOREBOARD - TOLL BROTHERS (TOL) - SI1

 

FINANCIALS SENTIMENT SCOREBOARD - TOLL BROTHERS (TOL) - SI2

 

FINANCIALS SENTIMENT SCOREBOARD - TOLL BROTHERS (TOL) - SI3

 

The following is an excerpt from our 90 page black book entitled “Betting Against the Herd: Generating Alpha From Sentiment Extremes Across Financials.”

 

Let us know if you would like to receive a copy of our black book, which explains this system and its applications.

 

BUYS / LONGS: Financials with extremely low sentiment readings of 20 and below on our index (0-100) show strong average outperformance in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 20 or lower rise an average of +15.1% over the next 12 months in absolute terms.   

 

SELLS / SHORTS: Financials with extremely high sentiment readings of 90 and above on our proprietary sentiment index (0-100) demonstrate a marked tendency to underperform in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 90 or greater fall in value an average of -10.3% over the next 12 months in absolute terms. 

 

 

FINANCIALS SENTIMENT SCOREBOARD - TOLL BROTHERS (TOL) - Absolute 12 mo

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


VIDEO FLASHBACK (11/6/15) | McCullough: Fed Rate Hikes & Why Recession Is A 'Live Possibility'

Takeaway: In this video from last November, Hedgeye CEO Keith McCullough explains why a U.S. recession is a "live possibility."

Last November, Fed head Janet Yellen called a December rate hike a "live possibilty." In the video below, Hedgeye CEO Keith McCullough countered that a U.S. economic recession was a "live possibility" too, especially if the Fed raised rates.

 

Well, they did. We called the ensuing stock market turmoil.

 

The likelihood of a U.S. #Recession is still firmly intact no matter what Janet Yellen said in her Congressional testimony today. Here's the video that explains why.

 

 


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