Post GE Transportation Merger, Wabtec To Join S&P 500, Barron’s Is A Fan, But Could Labor Unrest Derail Wabtec Stock?

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There’s a lot of news to report as GE(GE) completes its spinoff of GE Transportation on Monday, February 25 and merges it with Wabtec(WAB) immediately thereafter.  As we theorized last week, the bulked-up Wabtec will be added to the S&P 500, replacing Goodyear Tire(GT). Goodyear will take Wabtec’s place in the S&P MidCap 400, making this a neat swap. The change will take place before the start of trading on February 27.  The required buying by S&P 500 funds may well offset any odd lot selling by GE shareholders who find themselves with small Wabtec positions.

We also wanted to direct your attention to an article in Barron’s which takes a bullish view of Wabtec.

On a pro forma basis, Heymann forecasts that the new company’s earnings before interest and taxes margin will increase to 19.4% in 2022 from 16.2% this year, without factoring in the expected synergies from the merger. He expects GAAP earnings to hit $7.26 in 2020, versus $5.70 this year, with strong cash flow growth. Wabtec shares, which yield 0.7%, fetch 18.8 times their 2018 earnings estimate, versus a five-year average of 21.6, according to FactSet.

Another encouraging sign: “North American Class I rail traffic continues to be in solid growth mode,” says Elkott. It’s up 4.5% so far this year, compared with the level a year earlier. And that’s atop a 3.5% increase for all of 2018.

To help fund the deal, Wabtec expects to add nearly $3 billion to its debt, which would then total $4.6 billion—about 3.3 times the new entity’s adjusted earnings before interest, taxes, interest, depreciation, and amortization. Bulls view that as manageable. Investors should view the current stock price as an opportunity.

All is not rosy, however. The United Electrical, Radio, and Machine Workers of America is making noise about concessions it says Wabtec is demanding. The Union said it was prepared to strike. Wabtec responded, noting that every other union has agreed to the terms.

Wabtec will continue to offer a “best-in-class” wage and benefits package across the Erie area, which maintains a legacy average rate of $35 per hour, and that all current GE employees will continue to earn their existing salary or wage rate, said a Wabtec spokesperson. The company said it would also continue to offer a competitive 401K plan, comprehensive medical, dental and vision package, and accrued personal paid time off, comparable to what the UE employees earn today.

“We are disappointed with the UE 506 and 618’s response to our proposed initial terms and conditions in Erie, which will be implemented at the closing of our transaction with GE Transportation,” said the spokesperson.

Wabtec said every GE Transportation union except UE, including the IBEW, IUEm IFPTE, and EIAGPPE, have agreed to new collective bargaining agreements based upon the proposed terms and conditions.

If an agreement cannot be reached between Wabtec and UE, the union workers are prepared to take a strike authorization vote on Saturday. 

“We maintain committed to continuing discussions with the UE in Erie and hope they will reconsider for the benefit of the plant, its membership and the community,” said the Wabtec spokesperson.

Hopefully, this can be quickly resolved and will not have a material impact on the business.

Lastly, we’ve had a lot of comments asking questions about the mechanics of this transaction. GE is an incredibly widely held stock, and, in particular, many GE employees and retirees hold it in their retirement plan. It sounds like the retirement plan info sent out about the transaction was less than clear to some participants. The letter, which can be found here, states that GE retirement savings plan participants will receive Wabtec Stock Fund units proportional to their GE Stock Fund Units. This should follow the same ratio as the distribution to all shareholders: approximately 0.005403 Units of Wabtec for every Unit of GE. Plan participants will be unable to purchase additional Wabtec units, and the fund will liquidate its shares within one year. At that point, the value will be invested in a Target Retirement Date Fund consistent with the participant’s age.

Others asked about where the Wabtec shares will come. The answer, to wherever your GE shares are. So if you have GE shares in a brokerage account, your Wabtec shares will show up there. Also, a shareholder with around 100 shares asked how much cash he would get and when. 100 shares multiplied by the .005403 ratio yields .5403 shares. Since this is a fractional share, he will receive .5403 times the Wabtec share price in his account, probably within a few days of the close. At this morning’s price of 72.70, that would be around $39.28 in cash. The actual value will be set next week, however.

Keep the questions coming, I hope our answers have been helpful and that we can continue to be a useful resource for our readers.

Disclosure: The author holds shares in GE and GT, and will hold shares in WAB