Aside from Wabtec and one or two other supply companies, real growth in railroad industry is hard to find.

Implications: The current renaissance for the railroad industry began in 2004 when railroad traffic exploded (double digit gains in some key traffic segments) and freight rates were unlocked and allowed to seek a market level. For the railroad companies, the exceptional profit gains since 2005 have been almost exclusively due to continued rate increases, since traffic levels today are barely above those recorded in 2006. For most other companies in this industry, suppliers and financial companies, results have been mixed, with more seeing problems than enjoying the fortunes of the railroad companies. Wabtec is one of the few exceptions, and since its profits have not come from higher prices, it prospects for the future outshine even the railroads.

Analysis:

Wabtec used to be a staid old supplier of railroad braking systems, and it fortunes rose and fell with the health of the railroad companies; but that was when the company was known as Westinghouse Air Brake Company. For the past twenty years however, the company has growth both organically, i.e. by developing advanced products in its historical line of business, and synthetically by acquiring technologically oriented companies that complimented its old core business. One such acquisition was Pulse Electronics Corporation which was started and owned by Emilio Fernandez. This company invented and developed the event recorders during the late 1970s that are now on every locomotive in the US and Canada. Mr. Fernandez is a major director of Wabtec. The company also purchased Motive
Power Industries, a small locomotive manufacturer that had been spun off by Washington Group International, and grew the company into the dominant supplier of commuter railroad locomotives. The company has also been able to combine its other products and expertise within this company to produce locomotive cab control systems for other locomotive OEM and rebuilding companies.

The prospects for future growth in almost all of its business segments appear to justify the high P/E multiple current enjoyed by this company. Electronic brakes for 1.5 million freight cars, more locomotives for and expanding commuter train operation, and more companies that will be added to the Wabtec team should keep profits growing for many years.

 

Unlike Mr. Bradford, I do not own Wabtec, but I wish I had purchased it last year.