Analyst: Wabtec A Buy On Potential GE Synergies

Westinghouse Air Brake Technologies Corp WAB spiked as much as 7.7 percent Friday on news of talks to acquire General Electric Company GE’s rail business.

One analyst anticipates additional 13-percent upside.

The Rating

Stifel Nicolaus analyst Michael Baudendistel upgraded Westinghouse Air Brake Technologies Corp. from Hold to Buy and increased the price target from $75 to $99.

The Thesis

Baudendistel sees “strategic rationale” in Westinghouse’s purchase, particularly considering it lends long-sought exposure to international markets. About 43 percent of GE Transportation revenue came from foreign clients last year. (See the analyst's track record here.)

“The scale and unique capabilities of GE Transportation would make the deal transformative,” Baudendistel said in a note. “The transaction would also get WABTEC into manufacturing newly built locomotives — GE Transportation’s most well-known business — which would be a reasonably natural extension of WABTEC’s current businesses.”

Westinghouse is a significant supplier for GE and could unlock revenue synergies by vertically integrating locomotive units; at the same time, it could concede revenue on components sales to GE competitors, according to Stifel.

Considering the size of the potential deal, Baudendistel expects Westinghouse would raise equity, although it would be buying GE’s unit at a cyclical low point.

To be sure, Cummins Inc. CMI, Deere & Company DE or Komatsu could intervene with proposals for a “cleaner transaction," the analyst said.

“We believe there could be product development synergies with those companies,” the analyst said. “A diesel-electric locomotive is essentially a high-horsepower engine built for a specific purpose.”