ABB / Kuhlman: Sweetspot for the Power Grid

ABB Ltd. (ABB) finally made the move I’d hope they make! In this A.D.D. market only able to focus on 2 things, financials and oil, great things are happening at individual companies and not even registering on the radar.

ABB acquires U.S. transformer company Kuhlman Electric Corporation. This is one of the sweetspots (of the limited investable opportunities) for the power grid upgrade and buildout. I own SPX Corp (SPW) exactly for their transformer business, SPX Corp’s fastest growing business:

“Our Industrial Products and Services segment had revenues of $966.4, $836.7 and $716.0 in 2007, 2006 and 2005, respectively. Of the segment’s 2007 revenue, approximately 44% was from the sale of power transformers into the US transmission and distribution market.” ~SPX Corp’s 2007 10-K

One of my very first blog posts dealt with the twin drivers for the power grid infrastructure suppliers: U.S. power grid outdated by some 30 yrs, always using near capacity and a system shock away from massive destructive blackouts. The complementary driver: BRIC (and then some..Mid East especially, no one talks about Saudi Arabia building 4 Dubai-like cities….) countries building whole CITIES, of which the power grid is the foundation.

The problem with investing on this theme was the fragmentation of the electrical equipment suppliers whose products makes up the power grid. Thomas & Betts (TNB) and AZZ (AZZ) are a few to look at, but I still haven’t expanded my exposure beyond my ABB position. I chose ABB not just because it is a blue chip (that no one talks about) but also for its significantly advanced technology, for the power grid and others, like alternative energy (generating energy from waves? Yeah, ABB does that! Ever see an ocean that doesn’t move? No. It’s definitely more consistent than wind or solar). However, I was disappointed by the fact that ABB only had around 18% exposure to the U.S., which I perceive as one of the biggest opportunities for this power grid theme.

ABB knew this as well, presented the details more directly than I can: ABB at the Bear Stearns Capital Goods Conference (New York, Nov. 29, 2007). I urge you to skim through these presentation slides. It’s only 14 slides, and there’s pictures. Limited reading required.

ABB finally acted on this opportunity today, expanding its power products presence in the Americas by acquiring Kuhlman Electric Corp from the Carlye Group. This is a great move for ABB, who has quickly built up a lot of cash. So much cash that, when the former CEO quit, investors were beginning to worry that the company didn’t have opportunites to put the cash to work to increase shareholder value. This move also highlights the attractiveness of American companies to European companies.

In the press release:

“Michel Demaré, ABB’s Chief Executive Officer and Chief Financial Officer stated: “This transaction is the first milestone of our acquisition strategy, which is focused on finding bolt-on acquisitions that selectively complement both our product range and geographical presence. The addition of Kuhlman Electric’s business into our power products portfolio will allow us to further capture opportunities for profitable growth. At the same time, our customers will benefit from our broader offering.”

ABB plans to integrate Kuhlman Electric’s operations into its Power Products business in North America.

Bernhard Jucker, head of ABB’s Power Products division, said: “Kuhlman Electric’s high-quality products and experience complement ABB’s offering in North America, and the company will benefit from ABB’s long-established global infrastructure and our network of professionals within the power industry.”

This is a reminder that it pays to just stick with the good sea-change multi-year themes like the power grid story. Most money managers do not learn the new trends, stubbornly sticking with industries they’re used to, like financials and tech. Unless the manager is shorting these “traditional” portfolio components, how ugly are things?!? This isn’t being a “momentum trader” or “not being diversified.” This is living in reality, where cities are being built, and companies who build those cities will put money in your pockets. Good luck out there, do your research, and make your own judgments.

Resource Suggestions for Power Grid

• FERC Electric Power Markets: U.S. Government Data, Analysis, and Reports
• Power Engineering Magazine: Power Generation Industry Magazine
• Electric Light and Power Magazine

Disclosure: I own shares of ABB and SPW as of this post.

Comments

[Aalan]

Exposure to power-grid infrastructure is a key theme. Exposure to Swiss-franc-denominate... stock is another: much better holding power than dollars or Euros. And up 3.8% today.

[FISHBONE]

BUY THIS STOCK NOW!!!! JULY 24 EARNINGS, ABB IS GOING TO CONTRACT THE REBUILD OF U.S. POWER GRID.

[andys2i]

What do you think about the recent earnings and share price fall? Is this a good opportunity to buy the stock. I have been looking at this and AECOM.

[Jeffrey Lin]

yes. U.S. powergrid upgrade cycle and BRIC countries powergrid buildout the biggest investing opportunity no one is talking about = opportunity.

"ABB posted record orders of $11 billion in the quarter. Electricity providers in North America and Europe are modernizing plants, and China aims to spend almost $150 billion over five years to bolster its network after six years of blackouts." ~ABB Profit Climbs 34%, Driven by Power Grid Spending (Update2)

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