We presented an updated model of WAB for 2018, and make a couple of modifications here in response to feedback.
Replay, Slides, and Video Here: CLICK HERE
Transit Revenue Estimate: First, the book-to-bill we use to explain transit revenue growth was not matched. Over the last year, it comes out to ~13% (1.13) on next 12 month. Sure, the book-to-bill has been decelerating, potentially impacted by currency and acquisitions, and likely includes items that will, again, end up pushed out. We revise the number to 13% growth, with an associated EPS number of $3.39. By chance, that is still below $3.40, but not by as much as the original model. If you have already received the EQM, it is an easy fix from 7% to 13% growth or we can resend it.
The other feedback we have received mostly relates to leverage/cash uses, Material cost estimates, currency, and management.
- Cash Uses: We don’t model buybacks, but we could, perhaps model some interest cost declines as the company tries to reduce leverage. WAB didn’t generate much free cash flow last year, and seasonally generates the most of its cash in 2H. The impact of 2018 cash generation should show up in 2019, at least assuming that 2019 is a better year on the cash flow side.
- Materials Cost: On the second, we don’t know exactly why the Freight segment Material cost has decoupled from Steel in the last few quarters. In our opinion, partly supported by the weird negative correlation between Freight & Transit Material costs. Is steel cost allocation shifted between segments? Maybe. That said, it isn’t as though the freight segment no longer buys steel, and steel is going to be much more expensive in the P&L by mid-year, as we understand it. As for a shift to software and services, it would most likely result in a cost shift from Material to Labor.
- Currency Impact: We don’t make a significant adjustment for currencies, in part because we don’t have much of a forecast for them in 2018. So far, it is a revenue tailwind, but also one that should, in part, be captured in book-to-bill.
- Management: Does the WAB management team have a rabbit to pull out of the hat in 2018? That isn’t really their character, as we see it. Faiveley was the rabbit to offset the freight downturn. Maybe we are overestimating their commitment to the existing business, but we think the company would need a stronger demand environment to hit current estimates.
Please let us know if we can be of any help, or if you would like the associated EQM Model/dataset.
