ABB Poised to Cherry Pick Businesses Off of Siemens

Short piece out on Reuters (”Siemens to regroup international operations“) citing a German daily newspaper that Siemens is in the process of restructuring its international operations into 20 regional centers:

The trains-to-lightbulbs conglomerate, which is active in more than 190 countries, is in the midst of its biggest restructuring in nearly two decades.

Loescher has set himself the task of slashing needless bureaucracy and slimming down the company to catch up with more profitable rivals such as General Electric

ABB, my favorite power grid and automation infrastructure stock, got taken down by Seimens’ unexpected profit warning on March 17th. Siemens warned that it’ll miss current quarter earnings by $1.4 Billion after having given a positive outlook in January. The warning caused a 17% slashing of Siemens’ stock (which was warranted) but ABB caught a ricochet piece of shrapnel and traded down to $23.73 at one point on March 17th, some 9% below the $26 area where it closed the day before. But ABB has already bounced back like a champ, touching $25.4 on Tuesday’s trading.

Whoever was dumping ABB shares obviously do not understand that Siemens’ problems benefits ABB. The Siemens’ organization has been a structural mess for the past few years, even having its corporate office raided by government investigators a while ago. These problems are specific to Siemens.

Yes, ABB and Siemens have some similar businesses in the power and automation industries. However, ABB is the undisputed leader in the market it serves, with Siemens in 2nd place. Thus, as Siemens gets distracted with restructuring and internal problems, ABB will be cherry picking business off of Siemens. Also, Siemens is a gigantic conglomerate, maybe more comparable to GE than ABB, as Siemens makes everything from trains to cell phones and lightbulbs. From a corporate structure perspective, Siemens is much more complex and diversified than ABB. While that might seem like a safe position long term, ABB is firing on all cylinders with its more concentrated business in all the right growth areas:

Expanding infrastructure in emerging markets has increased demand for ABB’s (NYSE:ABB) products. As a result, the company expects its Asian market to grow 50% over five years. It also sees 40% growth in the Middle East, 25% in the Americas and 24% in Europe. And mature markets are always in need of replacements for aging parts and improvements to electric grids.
~ “Developing Nations Fuel Growth for ABB“, CNN Money, March 18th

This is the cheapest stock in my portfolio, with the company projecting between 10%-15% long term growth and a forward PE of 13.6. Given the strong business prospects just quoted, I think 10% - 15% long term growth forecast is too low. The company has been setting these conservative targets and consistently beats them. With a PEG of 0.74, this stock is ridiculously cheap, and would be cheaper if it hits the 18-20% growth I think it can achieve. This is a growth and a value stock and should be bought on any pullback or any dips caused by negative news out of Siemens.

Disclosure: author owns ABB as of this post.

Comments

[Marty & Luc...:]

ABB went down because Fred Kindle resigned, not because of anything SI did.

2008 Mar 31 08:19 PM

[Jumpin' Jebus:]

Kindle resigned in mid-February. The stock recovered until it dipped again (I suppose because of Siemens).

2008 Apr 06 06:30 PM

[Marty & Luc...:]

Silly. The whole market was tanking at that point. Trying to read in these convoluted reasons for share price will end you up in the funny farm.

Kindle resigned. The stock was weakened. The whole market tanked. End of story.

IMO, ABB *still* has to prove that Kindle's leaving won't affect them. I'm not the only one who feels that way.

2008 Apr 10 02:25 PM