ABB is a global leader in power distribution (high and medium voltage) and automation technologies. The company operates five divisions – Power Products, Power Systems, Automation Products, Process Automation and Robotics. ABB operates in 100 countries and employs around 110,000 people. I like it because......
· Set to benefit from the “Green New Deal”. ABB is no. 1 in the U.S. and a global leader in power grid technology which is set for double digit growth across all geographies. China has approved a five year plan resulting in a 33% increase in power infrastructure investment and expects countrywide rapid yoy infrastructure capex. The U.S. has passed multiple acts promoting “smart grid” investment with more promised by Obama. Almost all sales are directly affected by a push towards energy efficiency. ABB touts its ability to increase energy efficiency and cut costs along all business segments including $87bln in power generation and $50bln in oil and gas industries.
· Set to benefit from a global thirst for energy. Whether or not legislation is passed, an increasing demand for energy is likely to be seen as developing nations continue to build energy infrastructures. (51% of 1H09 orders from emerging markets). Order CAGR in emerging markets was 14% from 2003 to 2008.
· Solid fundamentals. ABB had $7.8bln in cash and generated $1.77m of free cash flow in 2008. This allows for a dividend yield of 2.5% at current levels. The company had total debt of $2.36bln and a net debt/equity of -44% (as compared to Siemens AG with 33%). The recent economic climate has forced a cost cutting initiative which ABB has done successfully. A $2bln plan has been implemented and is ahead of schedule resulting in a $1bln savings by Q309, 60% of which was done by moving labor intensive segments to low-wage countries.
· Valuation. ABB has been expensive but it currently trades at reduced levels. The 5-year average P/E premium to the S&P 500 is 36%. Looking at P/E and EV/EBITDA ABB is currently trading at an 8% P/E premium to the S&P and is discounted to its largest rival Siemens AG.
· Stimulus may not be imminent. The governments of the world are currently occupied with their economies and in the case of the U.S., healthcare. Job creation may take precedence to green energy and infrastructure focused stimulus, although they may be one in the same. This could put a hold on a government tailwind.
· Current demand weak. Though backlog is up 4% year to date, there is still strong uncertainty about demand. Sales were down 5% Q/Q after currency adjustments (10% w/o) and EBIT margins have fallen 3.4% in the same time frame. Growth is dependent upon industrial spending.
· Market Sensitivity. ABB is hurt by falling commodity prices and increases in the USD. Roughly half of 2004 to 2008 growth was due to commodity pass-through and dollar depreciation. A stronger dollar/falling commodity prices could create an additional hurdle for ABB to overcome.
· Dividend. The dividend yield of 2.3% is at the low end of the strategy’s spectrum. It has been paid since mid 2006.
Potential Catalysts for the Stock
· Government(s) announces stimulus packages that focus on electrical grids and infrastructure. May come via Copenhagen or Obama administration’s efforts to create jobs.
· Demand returns faster than expected and positive signs are seen through orders in Q4. Any industrial spending beat may be an indicator.
Potential Risk for the Stock
· Lack or change in stimulus and commercial spending keeps demand low for an extended period of time and puts pressure on prices.
· ABB makes an acquisition limiting the amount given to shareholders via the dividend.