What’s On the Menu for Buffett – Innovation, Technology, and Expansion
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The recent regulatory 13F filing of Berkshire Hathaway reveals that Warren Buffett has increased his holdings in Wabco and Deere & Co, while cutting his stake in Procter & Gamble and Johnson & Johnson. Berkshire cut down on P&G because of P&G's management’s incapability to come up with new strategic decisions to improve the company’s profitability. J&J was cut down because of its slowing dividend growth. Also, the tough macro-economic indicators have resulted in a decline in sales for both P&G and J&J.
The reason to add Wabco and Deere & Co. (NYSE: DE) is their industry-leading products/systems and future expansion strategies. Deere has an impressive dividend payout of ~14% over last five years and is backed by rock solid technology and healthy market presence. Its growth in emerging markets and focus on construction equipments makes it a lucrative investor’s entry point.
On the other side, Wabco has gained excellence in safe and fuel-efficient electronic and mechatronic products for commercial vehicles. Standing as proof of the success of its efforts is the 2012 Platinum Supplier Award from Wabash National to Meritor Wabco (JV between Meritor and Wabco). The company is currently trading at $57.41, having appreciated ~28% YTD.
The portfolio of Wabco is on a growing spree, with innovative products providing the company with a competitive advantage over its peers. Its new launch of Electronic Air Suspension System for trailers offers advanced safety features combining the functions of the conventional suspension and electronic suspension into one product. Its closest peers include Haldex, which has a strong foothold in the North American market, and Bosch, the leading supplier of automotive technology. But due to its unmatchable supply chain strength and its innovative product lines, Wabco is way ahead of Haldex and Bosch.
Key catalysts that make Wabco a preferred choice for investors are discussed below-
Innovation and Technology Expertise
Wabco’s leading product portfolio includes safe technology systems that are essential for both the vehicle driver and others on the road. Government regulations and consumers’ preference for safer products are the major drivers behind increased sales of advanced braking technologies, such as anti-lock braking systems and electronic braking systems, in which Wabco holds the expertise and has established itself as an innovative producer.
At the recently held UNECE’s World Forum for Harmonization of Vehicle Regulation, the European Union and the United States have adopted new vehicle safety regulations. The US adopted the regulations regarding a Lane Departure Warning System (LDWS), Child Restraint Systems (CRS), and Advanced Emergency Braking System (AEBS). The EU has made it mandatory for all commercial vehicles to use AEBS beginning in 2013.
With the new regulations coming in, Wabco is ready with its advanced emergency braking system (AEBS), which provides a fully autonomous braking system for moving commercial vehicles named, OnGuardPLUS™. The product also provides prior warning to the driver for stationary objects, thus reducing the risk of collision. It also decelerates the vehicles if it senses any obstacle in the vehicle’s path.
Geographic Expansion & Acquisitions
Outside of the US, Wabco is growing its operations in the emerging markets of Brazil, China, India, and Eastern Europe through partnerships and joint ventures. It has announced a partnership with the China Heavy National Truck Corporation (OptiDrive AMT) and a joint venture agreement with Guangdong FUWA Heavy Industry Co. (trailers). Additionally, its India region operations have seen tremendous growth in market share, with ~71 % growth in the OEM market. Further in line to chase this stupendous growth, it has acquired a 75% stake in Wabco TVS (India). It is expanding with its manufacturing units in Chennai and has also introduced new braking system aggregates for Kamaz Vectra vehicles and Daimler India Heavy and Light Duty Trucks.
Wabco acquired Ephicas, which holds its expertise through innovative sidewings and fuel efficient aerodynamic fixtures for commercial vehicles. Wabco will gain the opportunity to leverage its expertise in developing its own aerodynamic products to increase vehicle safety and fuel efficiency for the vehicles. Under the joint efforts of innovative and leading technologies, Wabco will offer OptiFlow™ to a global customer base.
Other than the above points there are some more sales avenues for Wabco:
- It has entered into a long term supply agreement with its largest customer Daimler, which contributes ~12% of Wabco's total revenue. Wabco will supply the highest performing single-piston air disc brake technology MAXXUS for the production on DTNA's trucks.
- Its agreement with the Gaz Group, a Russian manufacturer of commercial vehicles for supply of the anti-lock braking systems (ABS), integrated system for electronic tire pressure monitoring, IVTM™.is a good opportunity.
- It has a cost saving plan of $30 million, which the company expects to achieve through manufacturing and operating headcount reduction count.
Summing up, Wabco looks well set, with large backlogs of its products in several global markets. Its growth plans in the emerging markets through its products and capacity expansions in China and India will reflect in its increasing footprint, and also in revenue.
Coming on to its financial position, it holds a strong balance sheet with a current cash balance of $225 and a debt of $125 million. Additionally, it has made a share repurchase of $48 million in 3Q 2012, with $460 million remaining to be used in 2014.
ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services recommend Johnson & Johnson and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!