Did Westinghouse Air Brake Technologies Corp.'s Headwinds Abate This Quarter?

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Stiff headwinds had a significant impact on Westinghouse Air Brake Technologies' (WAB -0.07%) financial results in recent quarters. However, despite those issues, the company expects 2016 to be a record year. That's as long as those headwinds didn't derail its momentum during the second quarter. We'll know more when those results are revealed on July 25.

First, let's review

Last quarter, fluctuating foreign currency exchange rates sliced $18 million from Wabtec's top line. Because of that, revenue was down 6% when it would have only been down 4% on a constant currency basis. Moreover, a weakening global economy caused sales to slump in its freight group:

YOY = year over year. Data source: Westinghouse Air Brake Technologies Corp.

That said, earnings were up 3% to $1.02 per share thanks to a lower share count and improved margins. Furthermore, earnings would have been $0.03 per share higher if not for the impact of expenses related to the company's pending Faiveley Transport acquisition.

Are currency headwinds abating?

While foreign exchange rates cut into revenue last quarter, the impact seems to be diminishing. In the fourth quarter, for example, FX reduced sales by $27 million, which resulted in sales growing by just 1% instead of 5% on a constant currency basis. Ideally, investors will want to see an even more muted impact from foreign exchange in the second quarter.

One area to keep an eye on is a potential impact from the fallout of Britain's decision to leave the European Union. That vote led to significant volatility in the foreign currency market. But since it happened near the end of the quarter, it might not have the same influence on sales as it would have if it were earlier in the quarter. Still, currencies in general bear watching.

Is the macroeconomic picture stabilizing?

Aside from currencies, challenges in some key markets impacted Wabtec's first-quarter results. However, the company expects to be able to overcome these problems through a combination of cost reduction initiatives and projects in its backlog that are supposed to ramp up over the course of the year. This planned improvement, however, was contingent on macroeconomic conditions stabilizing.

Unfortunately, there are some signs that conditions aren't as stable as hoped. Railcar maker Greenbrier (GBX 1.19%) recently issued disappointing guidance. Greenbrier said that railcar deliveries would be at the lower end of its guidance range, which led it to reduce the top end of earnings guidance. Meanwhile, recent data showed that rail traffic volume in the U.S. is down 14% this year, with traffic also down in Canada and Mexico. This decline would imply weaker demand for not only Greenbrier's railcars but for Wabtec's rail products.

What's worth paying attention to is whether the dimmer outlook for railcar sales and weaker rail traffic data will have any impact on Wabtec's second-quarter results or its full-year outlook. As things currently stand, Wabtec is expecting its results to accelerate this year, driving record earnings even without the eventual impact of the addition of Faiveley.

Investor takeaway

So far, Wabtec has done an excellent job of navigating some tough headwinds. In fact, it's on pace for a record year as long as those headwinds don't strengthen. If they do, the company will need to be even more aggressive in its responses by ratcheting up its cost-cutting and efficiency improvement programs to hit its ambitious earnings target.