Wabtec (WAB)

Total return at 5 years: -1.3%/year = -1.9% appreciation + 0.6% dividend. The target price ($259) is ex-dividend; the $8 in dividends collected over 5 years are added separately.

The methods disagree: one places the value today above the price ($286) and the other below.

Today — expensive, no margin of safety: at $286 trades ~32.9% above its value discounted to today (~$215); the expected return does not even reach the risk-free rate (4.5%).

At 5 years — Sobrevalorado: the expected total return is negative — the price already discounts a demanding scenario that, if not met, results in a loss.

The bridge: the return at 5 years falls below the risk-free rate (4.5%) — which is why there is not even a discount to today's value. To require a 15% annual return, it would need to be bought at ~$134.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($286) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (5.5%/year) than we project (8.5%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$2.5 bn of owner earnings in year 5 (vs ~$2.9 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on EV/EBIT — EBIT terminal (industrial capital-heavy). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Wabtec is valued as a standard capital-heavy industrial (§4), EV/EBIT, and not like the twin Caterpillar: Caterpillar uses P/E over net income (ownerEarnings, cash/debt at zero) because its captive finance arm (CAT Financial) would double-count if an enterprise-value-to-equity bridge were built. Wabtec has no captive finance business, so the EV→equity bridge is built with the real cash and debt from the balance sheet (cash US$0.670bn, total debt US$6.571bn at 30-Jun-2026), and the flow feeding the model is NOPAT + D&A − maintenance capex (pre-interest), with no net margin row. The revenue path starts from the current guidance in the 8-K of 22-Jul-2026 (Item 2.02): FY2026 revenue US$12.30-12.60bn (midpoint +11.5% year over year) and adjusted earnings per share US$10.60-10.90 (midpoint +19.9%), the two anchors for year 1 (§5 R1 prior, the AMGN case). Growth decays smoothly from +11.5% toward ~+6% by year 5, consistent with the recent organic growth of each segment (Freight +4.1%, Transit +5.4%) once the recent acquisitions (Inspection Technologies, Frauscher Sensor Technologies, Dellner Couplers) annualize, without assuming new acquisitions. The operating margin expands modestly, in line with the operating leverage observed in the historical trajectory (12.1% FY22 → 16.4% TTM), driven by the mix shift toward high-margin aftermarket and digital. The company redeploys excess cash into bolt-on acquisitions (three closed in the last twelve months) rather than accumulating cash (`reinvestsExcess: true`, cash stays roughly stable on the balance sheet despite TTM free cash flow of US$1.71bn); the return of capital to shareholders combines a sustained net buyback (~1.5%/year of share reduction) with a rapidly growing dividend. The return on invested capital comes in below the 10% bar at the reported level because invested capital carries the goodwill of a history of growth through mergers (MotivePower 1999, Faiveley 2017, GE Transportation 2019, plus the three recent acquisitions) — the same pattern as BSX/DHR documented in the method —, and that reading is declared in the profitability note rather than penalizing the exit multiple twice over.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $259 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $286, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $259 in 5 years plus $8 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $215. Against the current market price ($286), the margin of safety is -32.9% (trades above the maximum → a premium is paid) and the total return at that price would be -1.3% annually.

• Entry multiple. The current EV/EBIT is well above the terminal exit band for a capital-heavy industrial [12x,18x].
• Optimism already priced in. The price already reflects most of the optimism about integrating the acquisitions.
• Dividend yield. The current dividend yield is low (~0.4% at the current price), contributing little to total return.
• Margin of safety. The base scenario leaves no margin of safety at the current market price.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✕ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (134%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Return on capital. Below the 10% bar, weighed down by goodwill from a history of growth by acquisition.
• Cash generation. TTM free cash flow of US$1.71bn, with healthy operating cash conversion on earnings.
• Operating leverage. Operating margin went from 12.1% (FY2022) to 16.4% (TTM) alongside sales growth.
• Stock-based compensation. Stock-based compensation equals just 0.8% of revenue, low materiality relative to cash flow.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

The multi-year backlog (firm orders) is the highest-signal leading driver for a rail equipment industrial: its growth (+41.7% year over year) anticipates revenue before it is recognized, though the company itself warns it does not guarantee conversion. The two segments — Freight and Transit — share the same volume × price driver (equipment deliveries and aftermarket contracts).

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Recent growth. Revenue +13.4% year over year over the trailing twelve months, accelerating from +7.5% in FY2025.
• Current guidance. The company raised FY2026 guidance to +11.5% revenue and +19.9% adjusted EPS.
• Organic growth. Freight and Transit grow organically 4.1% and 5.4% respectively, before adding acquisitions.
• Dependence on M&A. A large part of recent growth comes from three acquisitions closed within twelve months, not just organic operations.

• Business recurrence. About 60% of sales come from the spare-parts and maintenance market on an installed base of nearly 24,600 locomotives.
• Customer concentration. The top five customers account for ~30% of sales, with no single one above 10%.
• Pricing power. The company itself states that price competition has historically limited its ability to raise prices.
• Revenue visibility. Multi-year backlog of US$30.9bn (+41.7% year over year), though the company warns it does not guarantee conversion.
• Geographic diversification. About half of sales come from outside the United States, across more than 50 countries.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• !Leverage (net debt / EBITDA)Net debt / EBITDA 2.4x
• !Interest coverage (EBIT / interest)7.5x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 134% of ROIC
• ✕Value creation (ROIC − 10% bar)-2pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.5x — no over-investment
• ✓Float / working capitalFrees up cash $0.2 bn (float / negative WC)
• ✓Dilution (SBC % of revenue + shares)SBC 0.8% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Total debt of US$6.57bn against equity of US$11.21bn; required net leverage cap of 3.5x.
• Interest coverage. The credit agreement requires minimum coverage of 3.00x, with headroom against current EBIT.
• Liquidity. Total liquidity available of US$2.02bn as of jun-2026 between cash and credit lines.
• Free cash flow generation. TTM free cash flow of US$1.71bn, enough to cover dividend and buybacks without further leveraging the balance sheet.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Integration track record. Rafael Santana led the absorption of GE Transportation in 2019 and today runs three simultaneous integrations.
• Skin in the game. Directors and executives own just 0.6% of shares, per the DEF 14A proxy.
• Capital allocation. The dominant use of capital is bolt-on acquisitions, funded with a combination of cash and debt.
• Dividend growth. Dividend per share more than doubled since FY2022 (US$0.60 to a current rate of US$1.24).

• Coverage comparable to that of a larger-cap industrial is lacking, with Wabtec's recent story dominated by M&A headlines more than by the underlying business.
• The market may be extrapolating the recent growth pace (+11.5% guided, +19.9% in adjusted earnings) beyond the horizon over which that pace is sustainable without new acquisitions.
• Most of the optimism about integrating recent acquisitions is already priced in.

Unlike this section's usual pattern, no clear source of discount is identified for Wabtec: the market price implies an entry multiple well above the terminal exit band for a capital-heavy industrial, so the most honest reading is that the market is paying up front for the continuation of the recent acquisition pace, not that the business is misunderstood or being sold under pressure.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -16%/year (-57% total): the margin of safety protects the downside. The bull (+7%/year, +37% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Business cyclicality. Revenue subject to the rail capex cycle and government transportation spending.
• Customer concentration. The top five customers account for ~30% of net sales.
• Integration risk. Three acquisitions closed within twelve months (Inspection Technologies, Frauscher, Dellner Couplers) with no guaranteed synergies.
• Tariffs and trade policy. The company explicitly cites the risk of tariffs and retaliatory trade measures on its results.
• Financial debt covenants. The credit agreement requires interest coverage of at least 3.00x and net leverage of 3.5x or less.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  Fails the quality gate: ROIC 9% does not clear the 10% bar.

• Peter Lynch Growth at a reasonable price (GARP)

  A cyclical growing 9% at a multiple/growth of 3.3 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 4% (EBIT/EV) + ROIC 9% → falls outside the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 5% vs our 9%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -16%/yr over 5y (material loss) → risk of permanent capital loss.

• Pat Dorsey Moat strength (Five Rules)

  A narrow moat, stable; sources: switching costs, efficient scale, intangibles, cost advantage → partially passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting 5%, within what we project (9%) — the story squares with the numbers.