ABB Bullish on Intensive Restructuring, New Partnerships
Zacks Equity Research
Updated
ABB Ltd.’s ABB shares recorded an average return of 5.9% over the past six months, slightly underperforming the Zacks categorized Machinery - Electrical industry average of 9.4%. However, the company currently holds a Zacks Rank #2 (Buy), and here we will discuss the reasons why the stock may be at an inflection point right now, and could outperform in the near future.
Talking about earnings surprise history, ABB has posted robust, consecutive earnings beats in the trailing four quarters, for an average positive earnings surprise of 23.5%. The record is impressive, considering that ABB has been suffering due to weakness in the mining and oil and gas markets.
Further, the company still boasts robust fundamentals and is seeing improving prospects. This is reflected in analysts’ opinion as well, as the company has been witnessing solid activity on the earnings estimate revision front, reflecting bullish analyst sentiment. Over the past 30 days, the company has seen one upward estimate revision versus none lower. This has caused the Zacks Consensus Estimate for 2016 earnings to trend up from 98 cents to $1.04 per share, reflecting an increase of 6.1%.
ABB LTD-ADR Price and Consensus
ABB LTD-ADR Price and Consensus | ABB LTD-ADR Quote
ABB has been pulling out all stops to turn its fortunes around. It recently launched the third stage of the revamped version of its “Next Level Strategy”, which focuses on three areas, namely profitable growth, relentless execution and business-led collaboration.
This stage calls for restructuring ABB’s divisions into four market-leading entrepreneurial businesses, unlocking the company’s full digital potential, increasing momentum in operational excellence and boosting its brand as well. The restructuring will consolidate its operations and improve productivity.
We are also optimistic about ABB’s White-Collar Productivity savings program, which has surpassed expectations since its launch. In October, the company raised the cost-reduction target under this program by 30% to $1.3 billion. This should boost margins and improve productivity for the company.
ABB has indicated that its ongoing restructuring will likely include a strong shift toward digital offerings. In a bid to unlock its digital capabilities, ABB announced a strategic partnership with Microsoft Corporation MSFT, to shore up its capabilities in the industrial internet market, by combining cloud technology with industrial digital technology. Together, the companies will develop next-generation digital solutions on an integrated open cloud platform.
ABB has also been revamping its Power Grids business. In September, the company decided to sell its global high-voltage cable system business to NKT Cables, in a deal worth about $934 million. This deal will make the core power grids business simpler, stronger, and more focused.
In October, the Power Grids unit signed three important deals. One was a partnership with Fluor Corporation FLR, wherein the two companies will execute large turnkey engineering, procurement, construction electrical substation projects.ABB has also entered into an agreement to partner with Aibel, in order to deliver offshore wind integration solutions
ABB expects that the two alliances will enhance focus on higher-margin consultancy services and software, and will help increase the unit’s margin target to 10–14% (up from a previous target of 8–12%).In fact, over the period 2015–2020, ABB projects to increase operational earnings per share by 10–15% compound annual growth rate and deliver attractive returns on investments.
We believe that ABB’s partnerships and successful restructuring will drive sustained growth for the company.
Further, over the long haul, the company believes that its prospects are bright for all three major markets, including utilities, industry and transport & infrastructure. Positive development in the electricity value chain, rapid progress of Internet of Things, Services and People, rapid urbanization and a surge in energy-efficient transport & infrastructure bode well for the company in the long term.
Other Stocks to Consider
Another company in the same space as ABB is AO Smith Corp. AOS, carrying the same rank as ABB. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Headquartered in Milwaukee, WI, A.O. Smith is one of the leading manufacturers of commercial and residential water heating equipment, as well as water treatment products of the world. The company also boasts a striking earnings surprise history and has an average positive surprise of 5.9% over the trailing four quarters, beating estimates all through.
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