It's been an interesting year, to say the least, for shareholders in ABB (ABBN.Y -0.09%). The stock has been on a wild rollercoaster ride in 2020: Down nearly 40% in mid-March and then up 9% on a year-to-date basis after its second-quarter earnings report was released on July 22. What's going on and is there room for the stock to run?
ABB's wild year
Investors started the year hoping the industrial company's turnaround strategy would begin to bear fruit, just as the industrial economy looked set for a cyclical bounce. Moreover, following years of underperformance, a new CEO, Bjorn Rosengren, took office in March in order to oversee the transformation toward the kind of earnings margins enjoyed by its peers.
ABB is hoping robotics revenue will come back with increased automotive production. Image source: Getty Images.
As the chart of earnings before interest, taxation, depreciation and amortization (EBITDA) shows, ABB has consistently lagged its electrical equipment peers in recent years. It's doubly disappointing considering the company operates in some attractive end-markets such as industrial automation, robotics, and motion control. The opportunity for management to improve performance appears to be substantial.
ABB EBITDA Margin (TTM) data by YCharts
ABB looked like it was set for a solid recovery in 2020, but unfortunately, the COVID-19 pandemic had other ideas.
ABB's second-quarter earnings
Like most other industrial companies, ABB has been hit hard by the pandemic. Its second-quarter revenue declined by 10% year over year and orders declined 14% year over year.
Only the motion segment (motors, drives, traction systems, and services) is within management's target for margin, and that's thanks to a strong rebound in demand from China -- although whether that's sustainable remains to be seen.
ABB's robotics and discrete automation segment was hit hard by automotive production shutdowns and machinery customers closing factories. A decline in activity in renewable energy, oil and gas, and construction hit electrification product revenue.
Meanwhile, industrial automation is suffering from project deferrals in energy and process industries. Look out for commentary on this issue when Emerson Electric reports its third-quarter earnings on Aug 4.
In addition, management discussed an unusual phenomenon whereby industrial automation margins were affected because the pandemic negatively impacted its higher-margin services revenue -- something that's normally resilient in a downturn. That's something that could turn in ABB's favor in the coming months as services revenue comes back.
|
ABB Segment |
Revenue Growth First Half 2020 |
EBITA First Half 2020 |
EBITA Margin First Half 2020 |
Medium-Term Target |
|---|---|---|---|---|
|
Electrification |
(7%) |
$666 million |
12% |
15% to 19% |
|
Industrial automation |
(5%) |
$259 million |
9.1% |
12% to 16% |
|
Motion |
(3%) |
$509 million |
16.5% |
14% to 18% |
|
Robotics and discrete automation |
(21%) |
$102 million |
7.8% |
13% to 17% |
Data source: ABB presentations.
Turning to the outlook, management made sure to caution investors on the earnings release that "Despite unprecedented stimuli by governments and central banks around the world and a recovery in economic activity in China in the second quarter, macro-indicators continue to point to a deep global recession with uncertainty around the pace of recovery."
The market latched onto the commentary that "ABB expects some improvement in year-on-year order decline already in the third quarter," but then again it would be difficult not to beat the orders decline of 14% in the second quarter. Whichever way you look at it, ABB is set for a difficult second half.
Image source: Getty Images.
What it means for investors
ABB is an intriguing investment. There's plenty of potential for margin improvement and management is actively cutting costs and restructuring the company. Meanwhile, investors will be paid a 3.3% dividend yield while they wait to see improvement.
On the other hand, the COVID-19 pandemic has significantly impacted the near-term prospects for the company and the dividend of $0.83 a share won't be covered by the $0.65 in adjusted EPS that Wall Street analysts are expecting for 2020. Furthermore, the estimated $1.02 in 2021 doesn't allow for much room for error.
On balance, it's probably time to take some profits on ABB stock after the recent rise. At its current valuation, there isn't much of a safety net if anything goes wrong in the industrial industry.
