Editor's Note: Our Industrials analyst Jay Van Sciver added Wabtec (WAB) as a Best Idea Short on February 20, 2015. Shares are down over 30% since he laid out his bear case. Here's an excerpt from his original note. For information on how you can subscribe to our institutional research email firstname.lastname@example.org.
While we might be a bit early, we believe that a short WAB position offers excellent exposure to the downcycle in resources-related capital spending. Stating the obvious, railroads provide transport for bulk commodities. The rapid growth in output for iron ore, shale oil, and many other commodities drove a boom in capital investment in rail transport infrastructure. The gradual stagnation in bulk commodity output growth amid lower prices should drive global rail investment back toward long-run norms. This one may not be quick, but the return opportunity appears significant, as we currently see a normalized valuation range for WAB between $40 and $60 per share.
We believe the valuation of WAB shares reflect a premium ‘growth industrial’ story, which we see as analogous to the mining equipment companies (JOY, CAT) in early 2012. Back then, similar rationalizations based on population growth and aftermarket opportunities were employed to justify overvalued equity. We view both rail capital equipment and mining capital equipment as GDP-ish growth deep cyclicals, not industries experiencing secular growth.
There are several risks to our view including a huge commodity price rebound, S&P index addition, and the potential for WAB to be acquired. We would look to be long a cheaper industry player, or hedge appropriately, as discussed in last week's note.
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