Wabtec (WAB)

Rail equipment company Westinghouse Air Brake Technologies (NYSE:WAB) fell short of the market’s revenue expectations in Q1 CY2025 as sales rose 4.5% year on year to $2.61 billion. The company’s full-year revenue guidance of $10.88 billion at the midpoint came in 0.8% below analysts’ estimates. Its non-GAAP profit of $2.28 per share was 12.5% above analysts’ consensus estimates.

Company Overview

Also known as Wabtec, Westinghouse Air Brake Technologies (NYSE:WAB) provides equipment, systems, and related software for the railway industry.

Heavy transportation equipment companies are investing in automated vehicles that increase efficiencies and connected machinery that collects actionable data. Some are also developing electric vehicles and mobility solutions to address customers’ concerns about carbon emissions, creating new sales opportunities. Additionally, they are increasingly offering automated equipment that increases efficiencies and connected machinery that collects actionable data. On the other hand, heavy transportation equipment companies are at the whim of economic cycles. Interest rates, for example, can greatly impact the construction and transport volumes that drive demand for these companies’ offerings.

Other companies in the freight and passenger rail industry include Trinity Industries (NYSE:TRN), and European competitors Alstom (EPA:ALO) and Knorr-Bremse AG (ETR:KBX).

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Wabtec’s sales grew at a sluggish 4.2% compounded annual growth rate over the last five years. This wasn’t a great result compared to the rest of the industrials sector, but there are still things to like about Wabtec.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Wabtec’s annualized revenue growth of 10.3% over the last two years is above its five-year trend, suggesting its demand recently accelerated. Wabtec’s recent performance shows it’s one of the better Heavy Transportation Equipment businesses as many of its peers faced declining sales because of cyclical headwinds.

We can better understand the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Wabtec’s organic revenue averaged 9.4% year-on-year growth. Because this number aligns with its normal revenue growth, we can see the company’s core operations (not acquisitions and divestitures) drove most of its results.

This quarter, Wabtec’s revenue grew by 4.5% year on year to $2.61 billion, falling short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 6.1% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and implies its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.

Wabtec’s unit economics are better than the typical industrials business, signaling its products are somewhat differentiated through quality or brand. As you can see below, it averaged a decent 31.2% gross margin over the last five years. Said differently, Wabtec paid its suppliers $68.77 for every $100 in revenue.

In Q1, Wabtec produced a 34.5% gross profit margin, marking a 1.6 percentage point increase from 32.9% in the same quarter last year. Wabtec’s full-year margin has also been trending up over the past 12 months, increasing by 1.8 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Wabtec has been an efficient company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 13%.

Analyzing the trend in its profitability, Wabtec’s operating margin rose by 6.3 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q1, Wabtec generated an operating profit margin of 18.2%, up 1.7 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Wabtec’s EPS grew at a remarkable 13% compounded annual growth rate over the last five years, higher than its 4.2% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Wabtec’s earnings to better understand the drivers of its performance. As we mentioned earlier, Wabtec’s operating margin expanded by 6.3 percentage points over the last five years. On top of that, its share count shrank by 10.5%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Wabtec, its two-year annual EPS growth of 25.5% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q1, Wabtec reported EPS at $2.28, up from $1.89 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Wabtec’s full-year EPS of $7.92 to grow 9.9%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Wabtec has shown robust cash profitability, enabling it to comfortably ride out cyclical downturns while investing in plenty of new offerings and returning capital to investors. The company’s free cash flow margin averaged 12.2% over the last five years, quite impressive for an industrials business.

Taking a step back, we can see that Wabtec’s margin was unchanged during that time, showing its long-term free cash flow profile is stable.

Wabtec’s free cash flow clocked in at $191 million in Q1, equivalent to a 7.3% margin. The company’s cash profitability regressed as it was 4.8 percentage points lower than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends are more important.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Wabtec has shown solid business quality lately, it historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 6.5%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Wabtec’s ROIC has increased. its rising ROIC is a good sign and could suggest its competitive advantage or profitable growth opportunities are expanding.

Wabtec reported $698 million of cash and $3.50 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $2.22 billion of EBITDA over the last 12 months, we view Wabtec’s 1.3× net-debt-to-EBITDA ratio as safe. We also see its $186 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

While Wabtec's organic revenue missed and its revenue fell slightly short of Wall Street’s estimates, EPS beat handily on better profitability. Looking ahead, management reaffirmed previously-provided full-year revenue guidance and raised full-year EPS guidance, which is a positive. Management highlighted the strength of its international business and added that the company is “...approaching the remainder of the year with caution but with the discipline and focus to take the necessary actions to deliver against our commitments in an uncertain and volatile economic landscape.” Overall, this quarter was mixed. The stock remained flat at $172.20 immediately following the results.

Updated: May 21, 2025 at 10:03 PM EDT

Before investing in or passing on Wabtec, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

There are things to like about Wabtec. Although its revenue growth was uninspiring over the last five years, its growth over the next 12 months is expected to be higher. And while Wabtec’s relatively low ROIC suggests management has struggled to find compelling investment opportunities, its expanding operating margin shows the business has become more efficient. On top of that, its strong free cash flow generation allows it to invest in growth initiatives while maintaining an ample cushion.

Wabtec’s P/E ratio based on the next 12 months is 23.1x. Looking at the industrials landscape right now, Wabtec trades at a pretty interesting price. If you’re a fan of the business and management team, now is a good time to scoop up some shares.

Wall Street analysts have a consensus one-year price target of $211.36 on the company (compared to the current share price of $200.17), implying they see 5.6% upside in buying Wabtec in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist. We typically have quarterly earnings results analyzed within seconds of the data being released, giving investors the chance to react before the market has fully absorbed the information. This is especially true for companies reporting pre-market.