Rail equipment company Westinghouse Air Brake Technologies (NYSE:WAB) met Wall Street’s revenue expectations in Q3 CY2024, with sales up 4.4% year on year to $2.66 billion. On the other hand, the company’s outlook for the full year was close to analysts’ estimates with revenue guided to $10.4 billion at the midpoint. Its non-GAAP profit of $2 per share was 6.2% above analysts’ consensus estimates.

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“The Wabtec team delivered another strong quarter, evidenced by continued growth in sales, margin, earnings and operating cash flow,” said Rafael Santana, Wabtec’s President and CEO.

Company Overview

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

Heavy Transportation Equipment

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.

Sales Growth

A company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Luckily, Wabtec’s sales grew at a decent 8.3% compounded annual growth rate over the last five years. This shows it was successful in expanding, a useful starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Wabtec’s annualized revenue growth of 12.7% over the last two years is above its five-year trend, suggesting its demand recently accelerated.

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 because they don’t accurately reflect its fundamentals. Over the last two years, Wabtec’s organic revenue averaged 12.3% year-on-year growth. Because this number aligns with its normal revenue growth, we can see the company’s core operations (not M&A) drove most of its performance.

This quarter, Wabtec grew its revenue by 4.4% year on year, and its $2.66 billion of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 5.6% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and indicates the market believes its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.

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Operating Margin

Analyzing the trend in its profitability, Wabtec’s annual operating margin rose by 5.1 percentage points over the last five years, showing its efficiency has meaningfully improved.

In Q3, Wabtec generated an operating profit margin of 16.3%, up 1.8 percentage points year on year. The increase was encouraging, and since its operating margin rose more than its gross margin, we can infer it was recently more efficient with expenses such as marketing, R&D, and administrative overhead.

Earnings Per Share

Analyzing long-term revenue trends tells us about a company’s historical growth, but the long-term change in its 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 solid 11.6% compounded annual growth rate over the last five years, higher than its 8.3% annualized revenue growth. This tells us the company became more profitable as it expanded.

Diving into Wabtec’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, Wabtec’s operating margin expanded by 5.1 percentage points over the last five years. On top of that, its share count shrank by 9.1%. 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 give insight into an emerging theme or development for the business. For Wabtec, its two-year annual EPS growth of 24.6% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q3, Wabtec reported EPS at $2, up from $1.70 in the same quarter last year. This print beat analysts’ estimates by 6.2%. Over the next 12 months, Wall Street expects Wabtec’s full-year EPS of $7.39 to grow by 9%.

Key Takeaways from Wabtec’s Q3 Results

We enjoyed seeing Wabtec exceed analysts’ EBITDA expectations this quarter. We were also glad its full-year EPS guidance exceeded Wall Street’s estimates. On the other hand, its organic revenue missed and its revenue fell short of Wall Street’s estimates. Zooming out, we think this was a solid quarter featuring some areas of strength but also some blemishes. The stock remained flat at $190.30 immediately after reporting.

Is Wabtec an attractive investment opportunity at the current price?The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy.We cover that in our actionable full research report which you can read here, it’s free.