Please ensure Javascript is enabled for purposes of website accessibility

Why Wabtec Shares Fell Nearly 16% in May

By Lee Samaha – Updated Jun 10, 2019 at 9:45AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Fears that a slowdown in the economy would hurt rail traffic are the last thing Wabtec needs as it integrates a major acquisition.

What happened

Shares in rail technology company Wabtec (WAB -0.25%) declined 15.8% in May, according to data provided by S&P Global Market Intelligence

It's most likely down to some market skepticism regarding the economic outlook. As the economy goes, so goes the transportation sector, and when railroads start feeling the pressure, the first thing they do is try to cut costs.

A freight train.

Image source: Getty Images.

As such, companies like Wabtec, Trinity Industries, and Greenbrier Companies are always going to be close to the front of the firing line when sentiment turns negative on the economy.

WAB Chart

WAB data by YCharts.

The economy is all the more relevant because early in the year, Wabtec completed its acquisition of General Electric's (GE -2.88%) former transportation segment. It's a move designed to transform Wabtec into a leading player in the industry while generating significant synergies within a few years. That's well and good, but it should be noted that it increases Wabtec's exposure to the railroad industry, so any sign of a slowdown would not be well received while Wabtec is bedding in the new company.

In addition, the fact that GE's CEO Larry Culp has his company's remaining stake in Wabtec earmarked as a source of cash in order to reduce debt will also hang over the stock. 

So what

A quick look at Wabtec's first-quarter earnings report shows the company pretty much on track for 2019, and management affirmed its full-year guidance. That said, it's only owned the former GE Transportation business since February, so it's still early.

Turning to an industry perspective, the latest rail traffic report from the Association of American Railroads (AAR) saw its Senior Vice President of Policy and Economics John Gray talking about "heightened economic uncertainty that's being made worse by increased trade-related tensions [and] higher tariffs leading to reductions or disruptions of international trade, and lower industrial output."

There's no way around it: The fortunes of the railroads and rail equipment suppliers are tied to the economy.

Now what

In common with many of the cyclical industrial stocks, Wabtec is just going to have to wait and see how the economy unfolds in the second half. The underlying trends remain positive. But there's little doubt about the sensitivity to trade tensions, and the impact is exacerbated at Wabtec due to the importance of integrating its acquisition from GE.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Westinghouse Air Brake Technologies. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.