Why Is Wabtec (WAB) Down 47.8% Since Last Earnings Report?

It has been about a month since the last earnings report for Westinghouse Air Brake Technologies (WAB). Shares have lost about 47.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Wabtec due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Earnings Beat at Wabtec in Q4

Wabtec's earnings (excluding 33 cents from non-recurring items) of $1.04 per share, surpassed the Zacks Consensus Estimate by a penny. Moreover, the bottom line improved 7.2% year over year. Also, total sales soared more than 100% year over year to $2,368.4 million and surpassed the Zacks Consensus Estimate of $2,191.8 million. The substantial year-over-year increase in sales was owing to the inclusion of GE Transportation products and higher sales from the Transit segment.

Total operating expenses in the reported quarter increased in excess of 100% to $448.8 million, primarily due to 92.7% rise in selling, general and administrative expenses. Also, the operating ratio (operating expenses as a percentage of revenues) deteriorated to 18.9% from 18.2% in the prior-year period. Notably, lower the value of the metric the better.

Segmental Highlights

At the Transit segment, net sales inched up 1% to $701 million, driven by organic sales growth and acquisitions. Segmental operating margin (income from operations as a percentage of sales) increased to 5.6% from 5.2% in the year-ago quarter.

Freight net sales soared more than 200% to $1,667.1 million despite organic sales decrease and unfavorable foreign currency related movements. Segmental sales were boosted by acquisitions worth $1.3 billion. Segmental operating margin declined to 14.3% from 17.8% in the year-ago quarter.

Liquidity & Buyback

As of Dec 31, 2019, Wabtec had $604.2 million in cash and cash equivalents compared with $580.9 million at the end of 2018. Long-term debt at the quarter-end was $4,333.6 million compared with $3,792.8 million at 2018 end. The company’s board authorized a buyback program worth up to $500 million.

2020 Outlook

Sales are anticipated to be $8.7 billion. Adjusted income from operations is estimated to be $1.4 billion. Additionally, adjusted EBITDA is predicted to be $1.6 billion. Meanwhile, adjusted earnings per share are forecast in the band of $4.5-$4.8. For 2020, adjusted operating margin is expected to be 16% while adjusted effective tax rate is anticipated to be 25.5%. Moreover, the company hopes to achieve net synergy benefit of more than $150 million in the current year owing to its cost-cutting measures and synergies from its merger with GE Transportation. Further, cash flow from operations is expected to be around $900 million.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -13.68% due to these changes.

VGM Scores

At this time, Wabtec has a strong Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions looks promising. Notably, Wabtec has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.