Railroad Parts Supplier Set to Keep Ticking Higher
Friday, December 20th, 2013
By Mitchell Clark, B.Comm. for Profit Confidential
To illustrate the solid business conditions that exist in the railroad industry, Westinghouse Air Brake Technologies Corporation (WAB) is a company that’s growing and has been an excellent stock market investment.
Operating as Wabtec Corporation, which was created in 2009 with the merger of Westinghouse Air Brake Company and MotivePower Industries Inc., the stock has been in business since 1869.
Back then, George Westinghouse showed potential customers in the railroad industry the first air braking system for railcars. Three years later, he invented the first automatic air braking system, which would engage if a railcar got separated from the train. The first installation of this innovative technology was in 1872 on a Pennsylvania Railroad passenger train. The rest is a history of growth.
The company’s been doing very well recently, with a growing cash position (long-term debt also has been going up), rising shareholders’ equity, and solid sales and earnings growth for such a mature, old economy industry.
According to the company, its third quarter of 2013 saw sales grow 7.5% to $631.4 million, while earnings grew an impressive 17.4%. With virtually every railcar in North America using some of the company’s products, its strongest growth in the most recent quarter was in remanufacturing, overhauling, and build services.
Westinghouse has been an outstanding wealth creator for shareholders over the last 10 years. Like most other stocks, Westinghouse got beaten up during the financial crisis. But for the most part, this position has been a consistent performer, and I think it will continue to be a winner, with fundamentals in the railroad industry being so good. The company’s 10-year stock chart is featured below:
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Chart courtesy of www.StockCharts.com
One interesting thing about this business is that it’s not just a domestic operation. The company operates in more than 19 countries and in the first three months of 2013, 49% of its total revenues came from customers outside the U.S.
While Westinghouse is growing its sales in the high single digits, expectations for earnings growth this year and next are much higher.
The domestic railroad industry has proven to be strong the last several years, and a supplier like Westinghouse is going to continue benefitting from both the passenger railcar and freight segments. (See “Dow Jones Transports Leading the Market?”)
The latest trend in the railway industry is for more “green” (i.e. environmentally friendly) locomotives. The company recently signed a $63.0-million contract to sell new engines that meet Tier 4 emission standards (an 85% reduction in diesel particulate emissions and 75% reduction in mono-nitrogen oxide emissions compared to current models) to Metrolinx, a government agency in Ontario, Canada.
According to the company, the locomotives will be designed and built at its Boise, Idaho facility, with delivery expected in 2016. Metrolinx previously gave the company an order to repower 11 locomotives with the new engines.
I expect railroad stocks and suppliers like Westinghouse to maintain their price momentum in 2014. It’s great to see an old economy industry doing so well.
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