Editor's Note: Wabtec (WAB) is currently on our Industrials analyst Jay Van Sciver's Best Ideas List as a short. He is hosting a call today to update his thesis and preview their upcoming quarterly report. Send an email to email@example.com for access or for additional information about our institutional research.
KEY DISCUSSION POINTS:
- A Look At Freight Decremental Sustainability: WAB's report and guidance will test the sustainability of 1Q 2016's Freight segment decremental margin, which the 10-Q indicates was driven by lower Material costs. These favorable decremental margin expectations are now imbedded in 2H 2016 consensus estimates, and we expect the recent snap back in steel prices to have a significant 2H16 impact. While Materials costs went unmentioned in both the press release and earnings call, the company has apparently subsequently claimed mix as a factor; we do not find that claim credible.
- Consideration of Faiveley Deal Structure, Remedies: Investors should receive an update on the Faiveley acquisition, a deal we think management wanted to close by mid-year amid Freight segment pressure. Management has previously left no ambiguity that they expected to close the deal, but the information from regulators indicate to us that divestitures or other remedies will be required to close. Given the dearth of appropriate buyers for divested assets and not-so-minimal business overlap between WAB and LEY FP, comments should be interesting. The Faiveley merger remains a long thesis element for several large WAB holders.
- Our Take On Management: We have observed thesis drift among WAB longs. While initially embracing freight aftermarket and regulation-driven demand, the focus shifted to international Transit growth and Faiveley. Now, discussions typically end with how this management team will execute through the downturn. If management is not able to deliver, further thesis drift may lack a new port.
What Levers Are Next? This management will not ride the downturn quietly, in our view. Wabtec still has substantial balance sheet capacity, and we would expect disappointing headlines to be offset with positive ones. Results last quarter should have seen pressure, but management was able to pull a Materials cost rabbit out of the hat. We will consider some options and the associated risks.
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