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.



Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more

Premium insight

[UNLOCKED] Today's Daily Trading Ranges

“If I could only have one thing of the many things we have it would be my daily ranges." Hedgeye CEO Keith McCullough said recently.

read more

We'll Say It Again: Leave Your Politics Out of Your Portfolio

If your politics dictates your portfolio positioning, the Democrats and #NeverTrump crowd out there have had a hell of a week.

read more