ABB's Growth Catalysts & Multiple Headwinds: The Road Ahead
Zacks Investment Research | Mar 18, 2018 11:38PM ET
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 ABB Ltd Quote
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 Original post
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