Wabtec cautions investors amid disappointing earnings

Wabtec Corp. disappointed investors on Tuesday with a 21 percent drop in profits during 2016, as a downswing in the freight market sapped demand from its largest base of customers.

But the Wilmerding-based company, which manufactures products for the freight and commuter rail industries, believes a turnaround is in sight in 2017.

Fourth-quarter earnings were $38 million, or 42 cents a share, down from $102 million, or $1.05 a share, from the last three months of 2015. Excluding one-time charges, earnings would have been 81 cents per share.

The company missed expectations by 13 cents, as analysts polled by Thomson Financial had been looking, on average, for 94 cents.

Wabtec shares traded down nearly 6 percent on Tuesday, closing at $82.71.

For the full year, Wabtec reported a profit of $305 million, or $3.34 a share, compared with the $399 million, or $4.10 a share, it made in 2015.

In a call with analysts on Tuesday, Raymond T. Betler, Wabtec’s president and chief executive officer, called the results “disappointing.”

“There was a host of issues that resulted in the shortfall,” Mr. Betler said. But he added, “I think a lot of these issues were one-time unique issues that we addressed.”

Explaining that an earnings miss is unusual for Wabtec, whose profits climbed to record heights over several years as freight rail providers demanded more

components for locomotives, cars and signaling technology. But a decline in coal, oil and fracking products has put a dent in rail traffic, and Wabtec products are piling up in freight rail inventories.

A big reason for optimism is Wabtec’s $1.7 billion acquisition of Faiveley Transport, a French rail products manufacturer that the company had been eyeing for several years. Wabtec pegs the added value of the two companies working together between $15 million and $20 million in 2017, with annual value reaching $50 million within three years.

On the conference call with analysts, Wabtec executives referred to the “synergy” between the two companies nearly two dozen times.

In an interview earlier this month, Mr. Betler said Faiveley brings technology and engineering expertise that allows Wabtec to tap into markets in Europe and Asia, including China and Australia.

“We have a position there, but it wasn’t as large and definitely wasn’t as diverse,” Mr. Betler said, referring to Asia. “So there’s a lot of benefits, but the engineering capability and the products is very positive.”

Wabtec’s growth strategy also depends on continually seeking out acquisitions — not as large as Faiveley, maybe, but businesses that “fit nicely in terms of rounding out our portfolio,” Mr. Betler said.

Last year, Wabtec bought six businesses in parallel with the Faiveley deal, including a Knoxville-based maker of track switches that guide trains into and out of yards. “It’s kind of a niche product ... that’s all they do,” Mr. Betler said, but it fit with a Wabtec-owned operation that makes components for those switches.

Like other companies, Mr. Betler said he is looking forward to the Trump administration plans to make infrastructure projects a priority. He said more long overdue projects on the passenger rail system could move along quicker if systems such as the Port Authority of Allegheny County were privatized.

“You could take all the waste out by having a more deregulated or privatized approach,” he said. “It’s embarrassing and it’s unfortunate when I’m over in — pick a country — France, Sweden, Germany, and you can travel anywhere you want on a rail system efficiently and comfortably.”

In its financial outlook for 2017, Wabtec expects market conditions to persist through the first half of this year, but things to improve in the second half. It expects earnings per share to fall between $3.95 and $4.15, with a ramp up of backlogged rail projects and the boost from Faiveley.

Albert J. Neupaver, executive chairman at Wabtec, said the merger of Faiveley, finalized on Dec. 1, will be complicated, but that the process has been smooth.

“I don’t think we’re years away” from seeing improvements, Mr. Neupaver said. “I think we’re months away.”