Why ABB Looks Good to Me

Sheikh Mohammed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi, is the supreme commander of the armed forces of the United Arab Emirates. Despite these titles his interests extend far beyond war and mingling with aristocrats. Each year toward the end of January he hosts the World Future Energy Summit, a conference dedicated to sharing knowledge about the most recent advances in environmentally-efficient technology. The most prestigious award given at the summit is the Zayed Future Energy Prize, which includes multiple categories. 

Since 2010 a Zayed Future Energy Prize has been awarded to a large corporation. The winners between 2010 and 2013 were, in order: Toyota, Danish windmill manufacturer Vestas, Schneider Electric, and Siemens AG. The latter two companies are a French manufacturer of electrical equipment and a German conglomerate. As of February 18, 2014, the returns of large corporations that have won the Zayed Future Energy Prize have typically been satisfactory. 

   Price when award was received*   Dividends Paid Since**   Price on February 18, 2014   Total Return 
Toyota (2010 winner):                       $78.99 $2.17  $116.28 50%
Vestas ADR (2011 winner):                       $11.35 X  $12.04 6.1%
Schneider Electric SA (2012 winner):                       $63.35 $0.718  $86.14 37.1%
Siemens AG (2013 winner):                      $109.12 $7.125  $130.18 25.8%

*The conference is held around January 20th each year, so I assumed a purchase date of February 1st immediately after the company won the award

**Dividend data from Nasdaq and EDGAR

The trend outlined in the chart above is not in and of itself a logical justification for purchasing a stock. Purchasing the stock of a company right after it wins the Zayed Prize, solely for that reason, would be a very risky strategy. The employment of such a strategy would make the return on funds invested entirely dependent on the prowess of the committee that selects the winning company, an entity which most of us presumably know very little about. However, I believe that an astute investor would acknowledge the committee's past record as a sign that the winners it selects deserve closer investigation. This leads us to the 2014 recipient of the 2014 Zayed Future Energy Prize.

And the winner is...
Swiss electronics maker ABB  (NYSE: ABB  ) took home the Zayed Future Energy Prize for a large corporation roughly one month ago. ABB is one of those companies Peter Lynch would love because its business is both boring and incredibly important. Given the company's status as the world's largest producer of power grids, you could call the folks at ABB masters of electricity. One page of ABB's website gives us a small sample of instances where the company's technology has improved the quality of human life.

The past few annual reports from ABB lead me to believe that the trend of satisfactory performance from Zayed award winners will continue. To advance that point I have selected Quanta Services  (NYSE: PWR  ) , the largest contractor for electricity transmission and distribution in North America, as a foil to ABB. Throughout this analysis, make sure to remember that the price tag of ABB is $59 billion and for Quanta the figure is $7.5 billion. Let's begin our side-by-side analysis of ABB and Quanta Services by looking at their balance sheets. 

        ABB      

    Quanta Services      

Total Liabilities:    $28.86 B           $1.55 B
Liabilities/ Market Cap:     48.9%             20.7%
Current Liabilities:   $16.68 B           $1.04 B
Cash and Equivalents:   $6.485 B           $488.8 M

*Data as of December 31, 2013

From this table we can draw a few conclusions. Buying ABB over Quanta involves the assumption of relatively greater liabilities. Purchasing ABB over Quanta will only make sense if ABB has superior profit-generating power. Additionally, neither company's cash and cash equivalents amply covers its liabilities due within one year. That means that both companies will need to borrow if their cash from operations cannot cover their shortfalls. Clearly drawing a definitive conclusion will be impossible without examining each company's ability to produce profits.

Sweet cash flows
If you asked five investors to provide their favorite metric for gauging a company's profitability, it is unlikely that you would get five identical answers. Some individuals look at net income, others at income from operations, and some unfortunate souls even turn to EBITDA to guide them. Personally I have been taught that truly shrewd investors follow the cash flows. The reason for this is that cash flows are viewed as relatively less susceptible to "creative accounting methods" than net income. EBITDA, by ignoring what it does, does not accurately portray the amount of money which would flow into the pockets of an individual if he or she were actually the sole owner of the corporation.

 

   ABB   

   Quanta Services   
Free cash flow (2013)*:  $2.63B          -$30.24 M
Average FCF 2009-2013**:  $2.84 B          $86.05 M
As a % of Market Cap:    4.81%             1.15%
Average FCF 2004-2008***: $1.48 B          $87.8 M
FCF 5 year CAGR: 13.9%          Decline

Data from EDGAR

*Quanta has not released 2013 cash flow figures, its figure in this column is from 2012

** 2008-2012 for Quanta Services

*** 2003-2007 for Quanta Services

Quanta Services might win in a balance-sheet battle but the superior profit-generating power belongs to ABB, hands down. Although ABB is only about eight times larger than Quanta Services, it has generated approximately 32 times as much free cash flow, using an annual average, over the past five years. ABB's cash flow has shown respectable growth while Quanta Services has showed stagnation. Although it has relatively more liabilities, ABB wins where it counts and it wins big.

Foolish bottom line
The list of recipients of prestigious awards is an excellent place for eager investors to start digging. Past winners of the Zayed Future Energy Prize have been solid performers, and that trend is likely to continue with ABB. The societal value provided by the world's largest provider of electrical grids is undeniable. The presence of serious financial value is evident in the company's cash flows, which appear vastly superior to those of Quanta Services, an American company that engages in many similar business activities.

Admittedly ABB is a bit pricey at 21.5 times earnings. However, this is an extraordinary company that is one of the best in the business at providing electricity, which modern society needs to function. Why any businessperson would rather own Facebook or Twitter over a company like this is completely beyond my comprehension.

Trades that you can set and forget
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

 


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2863483, ~/Articles/ArticleHandler.aspx, 10/1/2014 6:35:10 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement