Everyone knows that hybrid and electric vehicles (EVs) are the future of transportation, so the excitement around investing in the sector is understandable. However, with many of the better-known plays in the industry looking expensive, it makes sense to consider some ways to play the theme and excitement that are off the beaten path. One way is to look at industrial conglomerate ABB (ABBN.Y 0.22%). Here's why.
High valuations
Focusing on the charging network companies, a quick look across the leading players like ChargePoint (CHPT -3.73%), Blink (BLNK -0.85%), and EVgo (EVGO -1.71%) shows a group of stocks trading on hefty valuations. They are all fine companies with potential, but they are currently loss-making. Moreover, when investors can't base valuations on earnings or cash flow they often use price-to-sales (P/S) ratios, and even on this basis, these stocks are looking extremely expensive.
| Company | Market Cap | 2022 Estimated P/S Ratio | 2023 Estimated P/S Ratio |
|---|---|---|---|
| EVgo | $719 million | 13.1x | 4.6x |
| ChargePoint* | $6.3 billion | 16.6x | 10.1x |
| Blink | $1.1 billion | 36.5x | 19.5x |
Data source: Marketscreener.com, author's analysis. *Data is for fiscal years 2023 and 2024.
Introducing ABB
If the charging network companies and other pure EV plays look expensive, but you still want exposure to an obviously fast-growing sector, then ABB could offer a good alternative.
ABB is a $75 billion market cap industrial giant set to generate around $29 billion in revenue in 2021. It operates out of four segments, namely electrification (installation products, power conversion, and e-mobility), motion (drive products, system drives, service, traction systems, low voltage, and large and electric motors), process automation (energy, process industries, marine and ports, turbocharging, and measurement and analytics), and robotics and discrete automation.
As you can see above, ABB's e-mobility (EV charging stations, hardware, and services) is a small part of its overall operations. Its expected revenue of around $480 million in 2021 is less than 2% of its expected overall company revenue in 2021.
Where ABB fits in
However, there are two key reasons why ABB is highly relevant as an EV play.
First, management is planning to take advantage of the sky-high valuations in the sector by listing the e-mobility business in 2022 yet retaining a majority stake. The cash raised from listing the company could be used to reinvest in the business in order to grow the business for the benefit of shareholders, including ABB.
Image source: Getty Images.
In a sense, ABB is getting the best of both worlds. It's set to gain from the high valuations accorded to EV companies, and it's also getting cash to reinvest in a long-term growth business. According to a Reuters article, the business is valued at around $3 billion.
Second, the e-mobility listing should be looked at in light of the restructuring effort that CEO Bjorn Rosengren initiated since starting his tenure in 2020. ABB has long had a collection of highly admired assets, with leading positions in robotics, process and discrete automation, motion control, and electrification, but its financial performance hasn't lived up to its potential. The chart below shows declining revenue, margin, and earnings in the decade before Rosengren took over.
Data by YCharts
ABB changes
However, Rosengren has fundamentally restructured how the company operates by moving away from its matrix model toward a more conventional pyramid structure of management, where more decisions are allowed to be made locally.
In addition, he continues to restructure the company's portfolio of businesses with the aim to focus on growth industries such as robotics, automation, and electrification.
ABB's 80.1% stake in its power grids business was sold to Hitachi for an enterprise value of $11 billion in 2020. The mechanical power transmission division was sold for $2.9 billion in cash to RBC Bearings in 2021. The turbocharging division (marine and power plant turbochargers) will be spun off or sold in 2022, and the power conversion division (power products and solutions for telecoms and data centers) is up for sale in 2022 as well.
Image source: Getty Images.
ABB's future
In common with other companies in its space, such as Siemens and Eaton, ABB is restructuring to focus on the themes of automation, digitization, and electrification in the economy. The so-called "fourth industrial revolution" emphasizes the use of web-enabled devices to better manage physical assets. ABB's divestments are proof of that, as is the plan to IPO the e-mobility division while retaining a majority stake.
EV companies may command nosebleed valuations right now, but ABB is a way to take advantage of it, and it makes perfect sense in the context of the company's transformational plans.
