Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does ABB Ltd (ADR) (ABB +2.97%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.
What we're looking for
The graphs you're about to see tell ABB's story, and we'll be grading the quality of that story in several ways:
- Growth: Are profits, margins, and free cash flow all increasing?
- Valuation: Is share price growing in line with earnings per share?
- Opportunities: Is return on equity increasing while debt to equity declines?
- Dividends: Are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let's take a look at ABB's key statistics:
ABB Total Return Price data by YCharts.
|
Passing Criteria |
Three-Year* Change |
Grade |
|---|---|---|
|
Revenue growth > 30% |
25.9% |
Fail |
|
Improving profit margin |
(23%) |
Fail |
|
Free cash flow growth > Net income growth |
(13.8%) vs. (3.1%) |
Fail |
|
Improving EPS |
(4.1%) |
Fail |
|
Stock growth (+ 15%) < EPS growth |
6.7% vs. (4.1%) |
Fail |
Source: YCharts. *Period begins at end of Q1 2011.
ABB Return on Equity (TTM) data by YCharts.
|
Passing Criteria |
Three-Year* Change |
Grade |
|---|---|---|
|
Improving return on equity |
(20.5%) |
Fail |
|
Declining debt to equity |
225.9% |
Fail |
|
Dividend growth > 25% |
14.3% |
Fail |
|
Free cash flow payout ratio < 50% |
66% |
Fail |
Source: YCharts. *Period begins at end of Q1 2011.
How we got here, and where we're going
ABB's performance has deteriorated since we examined it last year -- the industrial automation specialist didn't earn single passing grade in its second assessment, down from a mediocre three-of-nine score in 2013. The company's declining bottom line has been an ongoing problem, as two consecutive declines have now translated to weaker EPS as well as weaker return on equity. ABB's formerly strong dividend growth has also moderated as its free cash flow payout ratio rises toward unsustainable heights. Will ABB be able to turn these sliding metrics around and rebound in 2014? Let's dig a little deeper to find out.
Swiss conglomerate ABB recently posted lower-than-expected revenue and earnings per share for its first quarter as a shrinking order backlog -- down 1% to roughly $10.4 billion -- in its Power Systems division and charges related to offshore wind and solar projects crimped its growth. Large orders from utilities and late-cycle industries have been steady, but ABB's customers have not been so willing to open their pocketbooks lately. However, ABB enjoyed solid growth in its discrete automation and motion segment during the quarter. ABB has also inked an agreement with Maxwell Technologies (MXWL +0.00%) to integrate Maxwell's ultra-capacitors with its battery-based ENVILINE braking energy recuperation system, which will be used to upgrade railway lines near Philadelphia.
While its latest quarter was a disappointment, ABB's $1 billion acquisition of Power-One continues to look like a smart play on battery-storage solutions as renewable energy (solar and wind power) gains greater traction in the United States and around the world. Power-One recently announced the launch of inverter-based REACT energy storage systems for homeowners, which promise to make it affordable to store excess solar-generated energy during peak times for use during less sunny times. However, Elon Musk's tag-team enterprises SolarCity (SCTY +0.00%) and Tesla Motors (TSLA +2.40%) have been pushing their own battery-backup systems to SolarCity customers in California, Connecticut, and Massachusetts, and while neither of these companies has ABB's resources, they certainly boast higher mindshare among American consumers.
Fellow Fool Stephen Simpson notes that ABB has enjoyed robust growth in industrial motion and controls, robotics, and process automation, and it should benefit from order growth in the long-moribund European markets, as well as from surging power-generation investments from emerging economies. Last December, ABB teamed up with Statoil to expand subsea oil and gas production with the world's first full-scale subsea gas compression system. The company boasts ambitious plans to install complete processing systems into subsea wells with the establishment of "subsea factories" by 2020. This may not be enough to reverse ABB's slide, but it's a step in the right direction that could result in significantly expanded deepwater gas output around the world.
Putting the pieces together
Today, ABB has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.
