WABCO Holdings (WBC) reported a brisk quarter, this morning. The quarter showed us what is so very special about the WABCO franchise. The company's focus on technology and content in the global heavy duty truck market provides plenty of runway for continued above-market growth, despite the usual cyclicality inherent in global truck builds.
We highlighted WABCO here and here in recent months, citing the special attributes of this unique and debt-free company.
During the aftermath of Brexit, WABCO shares served as a downgrade instrument among sellside analysts, as they looked for tools to play the potentially negative economic outcomes inherent in Britain's eventual exit from the EU.
Boy, were they wrong.
They failed to recognize that EU truck builds have been in a tight band since 2009, following a large European pre-buy before then. So the cyclical bands in WBC's largest geography will likely be narrower, as we look forward from here.
WABCO reported organic sales growth over 11% in the second quarter -- well above many other cyclical companies -- some of whom are hovering at around 0% organic growth. WABCO's content per truck is rising, and the company has a strong technology platform that will serve as a future organic growth driver in geographies outside its European home markets, like North America, China and India.
The company has tight control over costs and strong operating leverage. As a result of the solid organic growth picture in 2Q, WBC raised 2016 earnings guidance $0.20 to a midpoint of $5.75. This is despite facing a higher structural tax rate.
Even if we see some cyclical headwinds in Europe into 2016, the base case of content and technology growth inherent in this business model serves as a buffer to that potential risk.
Historically, WBC has had a premium multiple over 20x earnings. With this quarter's confirmation that the content and organic growth story is still alive, I would suggest that shares could rise back toward this year's high near $120 a share. We liked the stock in the $80s and would continue adding as shares rise this morning.
Here is my caveat emptor when it comes to downgrades on the sellside: Especially in times of uncertainty, they can sometimes serve as a contrary indicator. High-quality companies, such as WABCO, need to be accumulated during periods of uncertainty. Because companies like this one provide just the opposite -- certainty.
