E Should Wabtec Continue To Pursue Faiveley Transport?

Wabtec WAB is a leading provider of equipment and services to the global rail industry. Its topWAB line growth has been anemic amid a slowing global economy. The company’s Q4 revenue only grew 1% Y/Y, yet the company trades at 20x earnings. To spur the top line it has been making smaller, bolt-on acquisitions. In October Wabtec struck a deal to acquire 51% of Faiveley FVLEF for an enterprise value of euros 1.7 billion ($1.9 billion). The transaction would add about a third to Wabtec’s revenue but it may be coming after Faiveley has peaked.

The Situation

Faiveley is a leading provider of integrated systems and services for the railway industry. The company supplies railway manufacturers, operators and maintenance providers with technology-based systems and services in Energy & Comfort, Access & Mobility and Brakes & Safety.

Over the first nine months of its 2016 fiscal year the company’s revenue of euros 802 million was up 8.1% Y/Y. Europe (56% of revenue) was down slightly while revenue from Asia/Pacific and the Americas was up 14% and 39%, respectively.

The Asia-Pacific region (22% of revenue) was buoyed by high deliveries in China, India and Australia. The Americas (21% of revenue) was driven by high volume freight sales in the U.S. and delivery of major projects in Canada. However, that might represent peak performance for the following reasons:

Railroad Traffic In China And The U.S. Has Fallen Off

Railroad traffic is declining in both China and the U.S. Goods shipped by China’s national railway fell Y/Y by 10.5% in 2015 — the biggest annual decline ever; that followed a 4.7% decline in 2014:

The total volume of goods transported by China’s national railway dropped by a tenth last year, its biggest ever annual decline, business magazine Caixin reported on Tuesday, a figure likely to fan concerns over how sharply the economy is really slowing.

Meanwhile, U.S. rail traffic for March 16th fell nearly 12% Y/Y. In my opinion, declining railcar traffic are harbingers of declining economic activity. Asia/Pacific and the Americas have delivered all of Faiveley’s top line growth. The fact that both regions are experiencing double-digit declines in rail traffic does not bode well for the company.