ABB Ltd. Ready to Ride a Capex Recovery

A leader in automation and power, ABB should benefit from improving demand in Europe and Asia.

Feb 26, 2014 at 12:01PM

Switzerland's ABB (NYSE:ABB) is one of those large companies that most people never think about, but wouldn't want to live without the end results of what they facilitate. ABB's automation products allow factories, refineries, power plants, and steel mills to operate smoothly, safely, and efficiently, while its varied products and service in the power market are vital to power generation and transmission. If you believe that Europe's economy is set to turn around and that emerging markets like China will continue to invest in power generation and factory and plant modernization, ABB is a name to consider today.

Automation seems to be picking up
Two of ABB's rivals, Rockwell (NYSE:ROK) and Siemens (NASDAQOTH:SIEGY), reported improving conditions in the automation market in their recent quarterly reports. Rockwell, which competes with ABB in areas like industrial motion and controls, robotics, and process automation in markets like oil and gas, saw 7% revenue growth in its most recent quarter, and management sounded generally upbeat about the prospect for improving orders in the coming year.

Siemens likewise seems to be on better footing. Siemens is a sizable head-to-head rival with ABB, competing in areas like motors, robotics, industrial motion, controls, and up and down the process automation industry (including markets like oil and gas, pulp and paper, chemicals, and metals and minerals). Siemens saw orders improve by 7% and likewise appears to be comfortable with the idea of improving orders in Europe and good growth prospects in China.

For ABB, the fourth quarter was a middling performance in automation, as discrete automation sales were up 8% as reported, but down about 2% on an organic basis, while process automation was up 3%. Much more encouraging was the 10% growth in discrete automation orders.

Power is a balancing act between potential and politics
Products and services for the power and utility market constitute a significant business for ABB. The company generates almost half of its revenue from the power products and power systems segments, including such products as transformers, switch gear, grid systems, and substations. It is also a business where ABB enjoys strong share competing with the likes of Siemens, Alstom, and Schneider.

Unfortunately, this has been a challenging business for ABB. It is sensitive to weather (witness the large $260 million charge in the fourth quarter due to storm-related delays in offshore wind power projects). It is sensitive to economic conditions, as utilities and businesses curtail spending in weak times. It is also political, as utilities and regulators wrangle over rate structures that give the utilities enough incentive to upgrade their infrastructure and as countries like China wish to see "national champions" emerge to compete with the likes of ABB.

I believe there is definite risk in the timing of power orders and revenue, but the potential is large. Western Europe and the U.S. need grid and transmission upgrades and countries like China, India, and Brazil need to add capacity. To that end, China's State Grid Corporation intends to spend 13% more in 2014, and much of that is likely to go to infrastructure products.

General Electric (NYSE:GE) also seems to provide some potential reason for optimism. GE saw a sizable increase in thermal and wind power orders in the fourth quarter, and while these companies do compete in some areas, an overall increase in generating capacity usually translates into more orders for equipment from ABB for other parts of the network.

GE and ABB have also made sizable bets on the future of renewable power, but at different points in the process. GE is a major player in wind turbines, while ABB has a large presence in substations, grid connections, and other components that basically patch the turbines into a network. Likewise in solar, where GE has some presence in inverters and ABB has a significant presence after its acquisition of Power-One.

Growth plus execution
ABB is looking to drive additional growth in automation by bulking up its offerings in areas like instrumentation and software. I believe ABB has ample room for improving its software offerings for applications like process automation, and this may be an area where the company looks to grow through acquisition – ABB has made a billion-dollar (or larger) deal for each of the last three years, and it has the capacity to do another sizable deal now. At the same time, I believe the company remains focused on cutting costs where it can, as prior efficiency drives have delivered good results.

I expect "predictable unpredictability" in ABB's revenues and orders, as its markets have long been cyclical and challenging to accurately forecast beyond the next year or two. That said, I'm looking for long-term-revenue growth of around 4%, with high-single-digit, free cash flow growth driven by better utilization on improving orders in Europe and growth in emerging markets.

The bottom line
Discounting those cash flows back, I arrive at a fair value of around $27 for ABB. Factoring in the dividend, I believe ABB can deliver annual expected returns of 10%-12%, well ahead of what you would normally expect from the broader stock market. With that in mind, and considering the prospects for better industrial orders in Europe and growing utility orders in China relatively soon, I still think ABB looks like an attractive stock to own today.

2 automakers riding the surge in the largest vehicle market in the world
U.S. automakers boomed after WWII, but the coming boom in the Chinese auto market will put that surge to shame! As Chinese consumers grow richer, savvy investors can take advantage of this once-in-a-lifetime opportunity with the help from this brand-new Motley Fool report that identifies two automakers to buy for a surging Chinese market. It's completely free -- just click here to gain access.

Stephen D. Simpson, CFA owns shares of ABB Ltd. The Motley Fool owns shares of General Electric 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers