The StockPointer ADR model portfolio was rebalanced this Monday, May 4th, 2015. For this week’s content analysis we’re taking a closer look at one of the companies sold, Wabco Holdings Inc (WBC), which has been in the ADR portfolio since July 2012. 
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When we acquired Wabco, the company was generating a return on capital of 23%, strong and growing. WBC has recently struggled to maintain a stable return on capital. Today, at 17%, its return on capital is the lowest it’s been in the past four years. The company is still generating positive EVA each quarter, but the long term trend is a steady decrease, as a decreasing return on capital is leaving less and less leeway. If there is no reversal of this trend in the next few quarters, Wabco risks seeing its EVA become negative.
From a valuation perspective, Intrinsic Value has fallen from $89 to $63 in the past two quarters, a 30% drop, leaving a P/IV ratio of 1.98, which we consider high. Future growth value (FGV) at 62.8% is also above our target range. An FGV of 62.8% implies that only 37.2% (= 100% – 62.8%) of Wabco’s total market value is supported (or “explained”) by its 12-month current operating value, leaving a large premium.
From the accounting performance numbers, besides share buy-backs, we don’t see anything particularly convincing. WBC’s sales over the past 12 months almost exactly equal what it sold in 2012, while providing lower operating income. EPS is unstable, and the company doesn’t pay a dividend. To close on a positive note, free cash-flow has been positive for each of the past four years.
