One of Wall Street's biggest winners of the day is Westinghouse, a railroads company whose shares have climbed 11.6% to a price of $294.05 -- near its average analyst target price of $301.27.
The average analyst rating for the stock is buy. WAB outperformed the S&P 500 index by 12.0% during today's morning session, and by 4.8% over the last year with a return of 22.9%.
Westinghouse Air Brake Technologies Corporation provides locomotives, equipment, systems, and services for the freight rail and passenger transit industries worldwide. The company belongs to the industrials sector, which generally includes cyclical companies -- with the exception of conglomerates whose business may span several industries. Cyclical companies experience higher sales during periods of economic expanision, and worsening outlooks during recessions.
Westinghouse's trailing 12 month P/E ratio is 41.7, based on its trailing EPS of $7.06. The company has a forward P/E ratio of 24.2 according to its forward EPS of $12.17 -- which is an estimate of what its earnings will look like in the next quarter.
As of the third quarter of 2024, the average Price to Earnings (P/E) ratio for US industrials companies is 24.03, and the S&P 500 has an average of 29.3. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
We can take the price to earnings analysis one step further by dividing the P/E ratio by the company’s projected five-year growth rate, which gives us its Price to Earnings Growth, or PEG ratio. This ratio is important because it allows us to identify companies that have a low price to earnings ratio because of low growth expectations, or conversely, companies with high P/E ratios because growth is expected to take off.
Westinghouse's PEG ratio of 1.37 indicates that its P/E ratio is fair compared to its projected earnings growth. In other words, the company’s valuation accurately reflects its estimated growth potential. The caveat, however, is that these growth estimates could turn out to be inaccurate.
To gauge the health of Westinghouse's underlying business, let's look at gross profit margins, which are the company's revenue minus the cost of goods only. Analyzing gross profit margins gives us a good picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack thereof.
WAB's gross profit margins have averaged 30.7% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins have slightly increased over the last four years, with an average growth rate of 3.2%. Westinghouse's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2025 | 1,759,000 | 260,000 | 1,499,000 | -7.87 |
| 2024 | 1,834,000 | 207,000 | 1,627,000 | 60.3 |
| 2023 | 1,201,000 | 186,000 | 1,015,000 | 14.17 |
| 2022 | 1,038,000 | 149,000 | 889,000 | -5.73 |
| 2021 | 1,073,000 | 130,000 | 943,000 | 45.52 |
| 2020 | 784,000 | 136,000 | 648,000 |
- Average free cash flow: $1.1 Billion
- Average free cash flown growth rate: 13.5 %
- Coefficient of variability (lower numbers indicating more stability): 0.0 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in WAB have received an annualized dividend yield of 0.4% on their capital.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Westinghouse's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 4, so the company's assets may be overvalued compared to the average P/B ratio of the Industrials sector, which stands at 2.89 as of the third quarter of 2024.
With a higher P/E ratio than its sector average, an average P/B ratio, and generally positive cash flows with an upwards trend, we can conclude that Westinghouse is probably fairly valued at current prices. The stock presents mixed growth prospects because of its weak operating margins with a positive growth rate, and an inflated PEG ratio.
