WABCO HOLDINGS INC WBC
September 30, 2011 - 11:26am EST by
Nic33
2011 2012
Price: 38.00 EPS $4.80 $6.00
Shares Out. (in M): 70 P/E 8.0x 6.5x
Market Cap (in $M): 2,663 P/FCF 8.0x 6.5x
Net Debt (in $M): -86 EBIT 387 444
TEV ($): 2,577 TEV/EBIT 6.6x 5.8x

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Description

Wabco was previously written up back in December 07, however I'm resubmitting as a long because the world has obviously changed pretty dramatically since then, as has the company itself, and recent general European and global fears have created an excellent entry point to buy stock.  Wabco is an outstanding company which has significantly outperformed its competitors in the truck supplier space both in terms of top line growth and margins, has excellent shareholder friendly management, a net cash balance sheet that they can use for attractive M&A as well as buy back stock, and the valuation is very compelling even assuming Europe goes back into recession.  The company trades at 8x earnings for this year, with European and US truck sales running below replacement demand levels.  I would argue for a multiple closer to 12-13x for a company with both secular growth due to content wins from increased safety regulations and technology to improve fuel consumption around the world, and cyclical growth due to where we are in the heavy duty truck cycle in Europe and North America.  At 12x this year's earnings, the stock is worth $57, a 50% premium to where it trades today.  At 12x my base case forecast of $6.00 in earnings next year, which assumes flat global truck production with Wabco outperforming due to content gains, the stock is worth $72, a premium of 89% to today's price.

For an in depth business description, you may pull up the previous write-up.  Briefly - Wabco makes advanced breaking, stability, suspension and transmission control systems for commercial vehicles - anti-lock braking systems, electronic braking systems, automated manual transmission systems, air disk brakes, etc.  The company's revenues are 60% Europe, 8% North America, 7% China, 7% India, 7% Brazil, 10% Other.  Roughly 25% of the company's revenues are derived from Aftermarket sales as opposed to original equipment sales, aftermarket business is higher margin. 

European truck sales are currently running at levels seen back in the lows of the 2002/2003 downturn, and 20% below average levels for the 5 years preceding the 2009 crash. Peak to trough European heavy duty truck sales fell 50% and NA fell 70%. Europe peaked in 2007, NA came one year earlier in 2006.  Of course we have bounced back in both regions from 2009 levels, but we are still running well below replacement demand.  Trucks need replacement every 5-7 years and the current age of the fleet in NA is at an all time high of 6.7 years.  The fleet is younger in Europe, there is no specific data in this regard but it should be approximately 4 years old.  The maintenance cost per mile on a truck increases nearly 50% in one year alone when a truck ages from 5 years to 6 years old.  See below for historical truck production figures.

European Heavy Truck Registration (> 16 Tons):

2004: 252k

2005: 271k

2006: 295k

2007: 320k

2008: 312k

2009: 164k

2010: 178k

2011E: 242k

North American Class 8 Production:

2004: 269k

2005: 339k

2006: 376k

2007: 212k

2008: 206k

2009: 118k

2010: 154k

2011E: 255k

In addition, Wabco has stated publicly that they can outgrow global truck production by 8-10% annually through 2015 due to content gains and increased penetration.  The content opportunity can be seen by looking at the content per vehicle in different geographies around the globe.  For example, Western Europe has the highest CPV at over $3000 on an average heavy truck price of $130k.  Eastern Europe on the other hand is a large opportunity, where CPV is under $500 on an average truck price of $70k.  North America is also a big opportunity where surprisingly the CPV is less than $1000 on an average truck price of $80k.  North America has not yet adopted air disc brake technology in the same way that Europe has, and the US recently revised maximum stopping distance requirements for trucks.  Additionally, proposed legislation in the US would offer fleets a 50% tax credit for the purchase of safety equipment such as brake stroke monitoring systems, vehicle stability systems, lane departure warning systems, and collision warning systems.  China and India currently have CPV under $300 on average $40k truck prices.  Wabco management has stated that even in a market environment where Chinese truck production is down 15%, Wabco will still grow revenue there, it outperforms general market growth in China by roughly 20%.  Though the content per vehicle discrepancy between Europe and other geographies might seem alarming given Wabco's 60% revenue concentration in Europe, there is still plenty of content growth opportunity there.  For example, in November 2011, a mandate to incorporate Electronic Stability Control will become effective in the EU.

Wabco's competitive positioning is very strong, with an estimated global 50-60% market share.  Major competitors include Knorr-Bremse, Haldex, and emerging market competitors - none of which can match Wabco's global breadth and product offering. 

In June 2011, in response to the deterioration of the firm's stock price, the company's board authorized a $400m share repurchase program over a 2 year period which they plan to fund from free cash flow.  They have $86m of net cash on the balance sheet, and annual free cash flow is currently running close to $400m.  Assuming they can buy back stock around these levels would add 50-60c to 2012 EPS. 

Wabco's EPS guide for this year is $4.55-$4.80 on roughly $2.7bn of sales, and based on current production forecasts for Q3/Q4, they should be able to achieve the high end of the range.  Therefore, the stock trades at 8x earnings for this year - for a company with strong secular and cyclical growth ahead.  On an EBITDA basis, the company trades at 5.7x this year. 

For 2012, I have run both a base case and recessionary forecast.  In my base case I assume global truck production FLAT, and Wabco growing 10% - in line with guidance for market outperformance.  I think the company can leverage the additional volume at 20% margins on incremental production, and assuming the company continues to buy back stock under the $400m authorization, gets me to $6.00/share of earnings and free cash flow.  At $38, the stock trades at 6.5x forward earnings and 5x EBITDA.

In my recession forecast for 2012, I assume global truck production down 25%, and Wabco outperforming again by 10%, so Wabco sales down 15% with 25% decremental operating margins.  This would get me to $3.80 of EPS once again incorporating the buyback, and the stock trades at 10x that figure.  In other words, we have a trough multiple on what should be trough earnings.  While the company lost money in 2009, Wabco underwent massive restructuring in the downturn and would not lose money this time around. 

Therefore, at 10x a recessionary forecast for 2012, and 6.5x a base case forecast, Wabco is a very compelling story for a company with excellent growth prospects, an excellent balance sheet, and shareholder friendly management with reasonable multiples providing upside north of 50%. 
BASE CASE MODEL:
    31-Dec
    2007 2008 2009 2010 2011E 2012E 2013E
                 
                 
Sales   $2,416  $2,588  $1,492  $2,176  $2,853  $3,138  $3,452 
growth yoy     7.1% (42.4%) 45.9% 31.1% 10.0% 10.0%
growth qoq                
                 
Cost of Sales   $1,668  $1,787  $1,037  $1,474  $1,922  $2,088  $2,282 
% of Sales   69.1% 69.0% 69.5% 67.7% 67.4% 66.5% 66.1%
growth     7.1% (42.0%) 42.1% 30.4% 8.6% 9.3%
                 
D&A   $92  $97  $90  $83  $78  $83  $88 
% of Sales   3.8% 3.7% 6.0% 3.8% 2.7% 2.6% 2.5%
                 
Streamlining Expenses   $4  $11  $37  $4  $0  $0  $0 
% of Sales   0.2% 0.4% 2.5% 0.2% 0.0% 0.0% 0.0%
                 
Gross Profit   $652  $694  $328  $615  $859  $967  $1,082 
% of Sales   27.0% 26.8% 22.0% 28.3% 30.1% 30.8% 31.3%
incremental margin     24.6% 33.4% 42.0% 36.0% 38.1% 36.5%
                 
Selling & Admin Expense   $291  $317  $252  $308  $358  $394  $433 
% of Sales   12.0% 12.2% 16.9% 14.2% 12.5% 12.5% 12.5%
growth     9.0% (20.5%) 22.3% 16.2% 10.0% 10.0%
                 
Product Engineering Expense   $84  $93  $75  $86  $110  $126  $138 
% of Sales   3.5% 3.6% 5.0% 3.9% 3.8% 4.0% 4.0%
growth     10.3% (19.1%) 14.2% 27.7% 14.4% 10.0%
                 
Streamlining Expenses   $9  $26  $20  ($2) $0  $0  $0 
% of Sales   0.4% 1.0% 1.3% (0.1%) 0.0% 0.0% 0.0%
                 
Other operating (income) expense $26  $11  ($4) $5  $4  $4  $4 
% of Sales   1.1% 0.4% (0.3%) 0.2% 0.1% 0.1% 0.1%
                 
EBITDA   $334  $343  $75  $301  $465  $527  $595 
% of Sales   13.8% 13.3% 5.0% 13.8% 16.3% 16.8% 17.2%
                 
Reported EBIT   $242  $247  ($15) $218  $387  $444  $507 
% of Sales   10.0% 9.5% (1.0%) 10.0% 13.6% 14.2% 14.7%
incremental margin yoy     2.8% 23.8% 34.0% 25.1% 20.0% 20.0%
incremental margin qoq                
                 
Equity Income in JV   $9  $8  $3  $10  $18  $18  $18 
Other income (expense)   ($7) ($4) ($5) ($2)      
Income from Indemnification   $0  $0  $41  $0       
Adjustment to non control interest $0  $0  ($12) $0       
                 
Interest Income (expense)   ($5) $4  $1  ($2) ($3) ($3) ($3)
                 
EBT   $240  $254  $13  $223  $403  $460  $523 
taxes   $111  $38  ($11) $37  $64  $74  $84 
tax rate   46.4% 15.0% (81.1%) 16.5% 16% 16% 16%
                 
NI   $128  $216  $24  $186  $338  $386  $439 
Less non control interests   $3  $3  $5  $12  $8  $8  $8 
                 
NI   $125  $213  $19  $174  $331  $379  $431 
Shares   69.3  65.9  65.0  66.5  69.0  63.4  63.4 
                 
EPS   $1.81  $3.24  $0.29  $2.62  $4.80  $5.97  $6.81 
2012 RECESSION MODEL:
    31-Dec
    2007 2008 2009 2010 2011E 2012E 2013E
                 
                 
Sales   $2,416  $2,588  $1,492  $2,176  $2,853  $2,425  $2,546 
growth yoy     7.1% (42.4%) 45.9% 31.1% (15.0%) 5.0%
growth qoq                
                 
Cost of Sales   $1,668  $1,787  $1,037  $1,474  $1,922  $1,657  $1,723 
% of Sales   69.1% 69.0% 69.5% 67.7% 67.4% 68.3% 67.7%
growth     7.1% (42.0%) 42.1% 30.4% (13.8%) 4.0%
                 
D&A   $92  $97  $90  $83  $78  $83  $88 
% of Sales   3.8% 3.7% 6.0% 3.8% 2.7% 3.4% 3.4%
                 
Streamlining Expenses   $4  $11  $37  $4  $0  $0  $0 
% of Sales   0.2% 0.4% 2.5% 0.2% 0.0% 0.0% 0.0%
                 
Gross Profit   $652  $694  $328  $615  $859  $685  $736 
% of Sales   27.0% 26.8% 22.0% 28.3% 30.1% 28.3% 28.9%
incremental margin     24.6% 33.4% 42.0% 36.0% 40.5% 41.5%
                 
Selling & Admin Expense   $291  $317  $252  $308  $358  $304  $319 
% of Sales   12.0% 12.2% 16.9% 14.2% 12.5% 12.5% 12.5%
growth     9.0% (20.5%) 22.3% 16.2% (15.0%) 5.0%
                 
Product Engineering Expense   $84  $93  $75  $86  $110  $97  $102 
% of Sales   3.5% 3.6% 5.0% 3.9% 3.8% 4.0% 4.0%
growth     10.3% (19.1%) 14.2% 27.7% (11.6%) 5.0%
                 
Streamlining Expenses   $9  $26  $20  ($2) $0  $0  $0 
% of Sales   0.4% 1.0% 1.3% (0.1%) 0.0% 0.0% 0.0%
                 
Other operating (income) expense $26  $11  ($4) $5  $4  $4  $4 
% of Sales   1.1% 0.4% (0.3%) 0.2% 0.1% 0.2% 0.1%
                 
EBITDA   $334  $343  $75  $301  $465  $363  $398 
% of Sales   13.8% 13.3% 5.0% 13.8% 16.3% 15.0% 15.6%
                 
Reported EBIT   $242  $247  ($15) $218  $387  $280  $311 
% of Sales   10.0% 9.5% (1.0%) 10.0% 13.6% 11.6% 12.2%
incremental margin yoy     2.8% 23.8% 34.0% 25.1% 25.0% 25.0%
incremental margin qoq                
                 
Equity Income in JV   $9  $8  $3  $10  $18  $18  $18 
Other income (expense)   ($7) ($4) ($5) ($2)      
Income from Indemnification   $0  $0  $41  $0       
Adjustment to non control interest $0  $0  ($12) $0       
                 
Interest Income (expense)   ($5) $4  $1  ($2) ($3) ($3) ($3)
                 
EBT   $240  $254  $13  $223  $403  $296  $326 
taxes   $111  $38  ($11) $37  $64  $47  $52 
tax rate   46.4% 15.0% (81.1%) 16.5% 16% 16% 16%
                 
NI   $128  $216  $24  $186  $338  $248  $274 
Less non control interests   $3  $3  $5  $12  $8  $8  $8 
                 
NI   $125  $213  $19  $174  $331  $241  $266 
Shares   69.3  65.9  65.0  66.5  69.0  63.4  63.4 
                 
EPS   $1.81  $3.24  $0.29  $2.62  $4.80  $3.80  $4.20 

Catalyst

Continued earnings reports and full year guide for 2012
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