Wabtec Offering Additional GE Shares

Written by Andrew Corselli, Managing Editor
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Wabtec Corp. recently filed a 20,485,156 share offering of GE, and expects to grant the underwriters a 30-day option to purchase up to an additional 2,048,515 shares. Wabtec said it will not receive any proceeds from the sale of the shares in the offering.

Goldman Sachs & Co. LLC, BofA Merrill Lynch, Citigroup and Morgan Stanley are acting as joint lead book-running managers for the offering. J.P. Morgan and BNP PARIBAS are acting as joint book-running managers for the offering.

In its July 30 2Q19 earnings release, Wabtec indicated that GE had informed it that it was considering seeking to liquidate the balance of its stock holdings during 3Q19. Wabtec had issued 47.8MM shares to GE in the GE Transportation merger, 25.3MM of which GE sold in the market in 2Q19. Wabtec said it believes “there is solid demand for shares by current and prospective investors as there was for the first sale by GE. However, volatility cannot be ruled out in the immediate term.”

Analyst Matt Elkott of equity research firm Cowen and Company noted that “Wabtec is well-positioned to benefit from the accelerating growth of global transit rail markets. We view the transformative GE Transportation merger favorably and expect it to be highly accretive. Valuation looks compelling. We rate WAB Outperform.

“We continue to favor WAB, our top Smidcap idea. In 2Q19, the company demonstrated solid execution in a soft North American market. It beat expectations top to bottom, raised EPS guidance modestly, and raised cash flow guidance materially. This occurred as the company was putting new focus on cost cutting and capitalizing on specific opportunities in an otherwise tempered North American freight market. Additionally, international markets for both freight and transit equipment and services remain solid.

“The GE overhang, which we believe has kept some prospective WAB investors on the sidelines, is about to largely disappear. We view this favorably, although some volatility could occur in the immediate term as 20.5MM shares are being offered. This comes after WAB’s first offering of shares for GE was met with strong demand and the sale of 25.3MM shares in the market in 2Q19.

“WAB has no perfect publicly traded comp. The closest is Germany-based Knorr-Bremse (KBX), which launched its IPO in October 2018. WAB is now trading at ~12.5x 2020E EPS, excluding deal amortization. KBX is trading at ~20x 2020E EPS. We believe this valuation discrepancy is nowhere near fully warranted. On the Wabtec legacy front, this is a business operating in a largely duopolistic market (along with KBX) that is otherwise fragmented beyond these two companies, where consolidation opportunities abound. On the GE Transportation front, WAB has a clear leadership position in locomotive manufacturing with even higher barriers to entry than its legacy business and KBX’s rail business. Our $92 price target is based on a ~18x multiple applied to our $4.15 2019E EPS estimate plus $0.70 of deal amortization. We then add ~$6/share to reflect the $1.1B net present value of the tax benefit resulting from the merger.”

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