The $7 billion rail equipment manufacturer Wabtec (WAB) is fighting a cyclical downturn in its business. The company has tried to plug the gap with an acquisition that hasn’t lived up to the hype. Now, the Chinese politburo has set some very aggressive goals that will directly compete with Wabtec’s business.
Not good.
That’s why Hedgeye Industrials analyst Jay Van Sciver hosted a conference call with institutional subscribers recently to reiterate his short call on the company. The key takeaway? Wabtec’s core business is rolling over.
According to Van Sciver in the video excerpt above:
“The most important thing from this section to take away is deliveries of things like railcars and locomotives are still above replacement demand. You still had over 15,000 delivered in the third quarter, probably have an equivalent pace to that now. That’s still very elevated by historical standards. We’re still working off what had been a record backlog. Orders are coming in at less than a third of deliveries, and that tells you a lot about where revenues and margins are going. Trade orders not sales.”
Here’s an additional key bit of advice on trading Wabtec from Van Sciver:
“The most important thing is to avoid shorting high short interest names on weakness. That’s an important point. Wabtec is a name that’s expected to do badly. That’s why it has a 16% short interest. When it does badly that is not the unwind of a Valeant Pharmaceuticals. You press something that is really unwinding. In a cyclical you trade around a short position. When they go down a lot you don’t press, you cover.”
Watch the video above to hear three reasons Van Sciver advises investors to sell Wabtec.
