ABB's Growth Catalysts & Multiple Headwinds: The Road Ahead

ABB Ltd.’s (NYSE:ABB) earnings history of late shows an impressive beat streak with the company’s bottom line trumping estimates in each of the trailing four quarters for an average positive surprise of 14.1%. Last quarter, it beat estimates by 32%.

However, the company’s shares have underperformed the industry in the past six months, having gained just 7.1% compared with the industry’s rally of 13.3%

We expect this Zacks Rank #3 (Hold) stock to accelerate its growth momentum in the near future, driven by solid contributions from its accretive acquisitions, successful restructuring efforts and cost-saving initiatives. However, the company is clearly facing some multiple headwinds to be concerned about. Read on to find out the key growth drivers and risks for ABB right now.

Growth Drivers

Steady growth in revenues in the Electrification Products and Robotics & Motion segments has been a key contributor to ABB’s momentum. The Robotics and Motion segment has been enjoying robust demand patterns in robotics and light industry while the Electrification Products unit is benefiting from positive construction and utility demand, particularly in the AMEA region. The Electrification Products business has also been expanding in the emerging markets, on the back of its microgrid products, designed specifically for the shift to renewable power generation.

Improving base order trends and underlying profitability improvement from ABB’s accelerated simplification and cost-reduction efforts will be conducive to bottom-line growth. As the recent end-market demand challenges and raw material costs begin to subside, strong cost-reduction actions will likely enhance profitability for ABB in 2018. The company also expects a diminishing impact from commodities this year as its recent price increases get implemented fully, which in turn should boost its margins.

ABB has earned a solid reputation for winning strategic awards and forging important partnerships. It recently teamed up with Hewlett Packard Enterprise to integrate its industry-leading digital offering, ABB Ability, with Hewlett Packard’s innovative hybrid information technology solutions. The partnership looks promising to leverage ABB’s expertise in operations technologies (OT) and Hewlett Packard Enterprise’s proficiency in IT to come up with joint industry solutions, which would help turn industrial data into insights and automatic action.

ABB also joined forces with Kawasaki Heavy Industries Ltd. recently to share knowledge and promote the advantages of collaborative robots, particularly those with dual arm designs.

We are highly optimistic about ABB’s recent $2.6-billion acquisition of GE Industrial Solutions, which might fortify its global foothold in electrification and expand the company’s access to the North American market.

Further, the company anticipates the latest B&R buyout to bridge the gap in machine and factory automation while also generating tremendous operational synergies. ABB also agreed to acquire the data transmission business of the KEYMILE Group in July 2018. This transaction is predicted to expand communication networks business footprint in the industrial, transportation and infrastructure domains. ABB estimates these integrations to help shift its focus to higher growth segments, thereby adding a more competitive edge to its profile.

The company is highly positive about the impact of its White-Collar Productivity savings program, which has garnered significant cost savings over the past few quarters. Moreover, positive investments made by all three major markets of the company, namely utilities, industry and transport & infrastructure, are forecast to boost the financials, going forward.

The consensus analyst community’s optimism on the stock is reflected in its upward estimate revisions. The stock has seen the Zacks Consensus Estimate for current-year earnings being revised upward to $1.37 from $1.41 over the past 30 days, highlighting a bullish sentiment around the stock.

ABB Ltd Price, Consensus and EPS Surprise

Risks

ABB’s exposure to oil and gas markets makes it susceptible to current price volatility in the market, thus posing a severe challenge. We believe, lower capital spending for the upstream energy end-markets might hurt financials as well. Sales growth for ABB depends on the stabilization of the energy markets.

Further, incremental investments in ABB’s Power Up productivity optimization program and the dilutive impact of the GE Industrial Solutions acquisition pose threats to the company’s margins in 2018. Also, the company has been facing tangible commodity price concerns, hurting its profits for a while. The prices are still on the rise and are expected to dent margins in 2018.

The company’s backlog has also declined in recent times, particularly for the Industrial Automation and Power Grids segments, which does not bode well for the performance going into 2018. Further, in developed economies, utilities’ cash flow has been constrained of late and this has limited the spending to upgrade the aging transmission and distribution grid infrastructure. This in turn also restricts ABB’s prospects.

Also, there have been strong structural headwinds in ABB’s largest business — Power Grids — in the past few quarters. ABB predicts this trend to continue this year as well. Additionally, a sluggish industrial production and the projected slowdown are weighing on the company’s financials. Currently, the industrial slowdown in China is posing another threat to the company’s profitability and might impact its performance in the upcoming quarters.

To Conclude

On the face of it, it seems that the company’s growth drivers outweigh its risks. In terms of valuation, the company’s trailing- twelve-month PE stands at 19.4, lower than the industry’s PE of 22, indicating that ABB is slightly undervalued relative to its industry.

Stocks to Consider

Some better-ranked stocks in the broader space are Deere & Company (NYSE:DE) , Titan International, Inc. (NYSE:TWI) and Alamo Group, Inc. (NYSE:ALG) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Deere & Company delivered an earnings beat over the trailing four quarters with an average positive surprise of 17.3%.

Titan International has outpaced estimates twice in the last four quarters. Last quarter, it trumped estimates by 23.1%.

Alamo Group has a decent earnings surprise history for the same time frame, having surpassed estimates thrice with an average beat of 12.2%.

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