Company Reports

Wide-moat ABB delivered EBITA margin expansion of 160 basis points to 17.9% during the first quarter, smashing company-compiled consensus by 110 basis points and sending shares 6% higher. Strict cost-control has been a feature under Bjorn Rosengren’s tenure, with the added benefit to profitability from higher selling prices. The strong first quarter provided management confidence to raise its full-year EBITA margin to approximately 18%, a slight improvement from the 17% achieved in fiscal 2023. We raise our fair value estimate to CHF 40.5 from CHF 36.5 to account for its EBITA margin uplift and the strengthening of the USD against the CHF. We believe the foundation of a better operational business has been set, which will allow the firm to maximize its operating leverage from the several long-term structural growth drivers it enjoys.

ABB enjoys a number one or two market position in two thirds of its product segments, which is largely derived from centuries of deep-domain expertise in supplying mission-critical equipment with a high cost of failure for a variety of end markets. Its wide range of product categories and operating businesses have led to several costly restructuring programs and underperformance versus its European capital goods peers, due to the complexity of the organization. The divestment of its capital-intensive Power Grids business and the appointment to CEO of turnaround specialist Björn Rosengren have helped simplify the group through decentralization and active portfolio management, and subsequently improved the profitability of the business. The departure of Rosengren as CEO in 2024 is a likely indication that the major components of the restructuring have been executed, but the foundations have been set to enjoy the operating leverage from higher volumes.

ABB announced Björn Rosengren will be retiring as CEO and will be replaced by company veteran Morten Wierod from July 31. Rosengren lived up to his reputation as a turnaround specialist during his tenure at ABB, playing a pivotal role in improving the group’s EBITA margin from 11% to 17%, through decentralization and portfolio management. We believe the departure of Rosengren confirms our view mentioned in our earnings note on Feb. 1, “ABB Earnings: Margins Reached Record Levels; Slight Improvement in Fiscal 2024 Guidance,” that the major components of the restructuring have largely been completed and therefore, we don’t expect material operating margin improvement in future. We maintain our CHF 36.50 fair value estimate and view shares as fairly valued.

ABB enjoys a number one or two market position in two thirds of its product segments, which is largely derived from centuries of deep-domain expertise in supplying mission-critical equipment with a high cost of failure for a variety of end markets. Its wide range of product categories and operating businesses have led to several costly restructuring programs and underperformance versus its European capital goods peers, due to the complexity of the organization. The divestment of its capital-intensive Power Grids business and the appointment to CEO of turnaround specialist Björn Rosengren have helped simplify the group through decentralization and active portfolio management, and subsequently improved the profitability of the business, comfortably exceeding its initial EBITA margin target of at least 15%. The departure of Rosengren as CEO in 2024 is a likely indication that the major components of the restructuring have been executed, reducing the magnitude of future margin expansion.

Wide-moat ABB comfortably met its expectations set during fiscal 2023, achieving a record EBITA margin of 16.9%, marginally beating our 16.7% estimate. The 160-basis-point improvement in operating margins was broad-based across divisions. A deceleration of orders during 2023 will restrict meaningful operating leverage in fiscal 2024 and may result in a slight margin expansion at best, reflected in management’s guidance of a slight EBITA margin improvement. We believe this indicates that the major components of the restructuring under CEO Bjorn Rosengren have largely been completed. Management guided for 5% revenue growth during fiscal 2024, slightly ahead of company-compiled consensus, but in line with our estimates, which explains the slight share price increase. We maintain our CHF 36.50 fair value estimate, which is trading in line with the current share price.

The U.N. Climate Change Conference, otherwise known as COP28, has reiterated the secular growth theme underpinning our recently upgraded forecasts for the capital goods manufacturers. Combating climate change requires upgrading electricity grids to accommodate renewable energy and greater adoption of energy-management solutions for energy-intensive infrastructure, such as buildings and data centers. Wide-moat Schneider Electric is best positioned, in our view, and is trading at a slight discount to our recently revised EUR 174 fair value estimate.

Wide-moat ABB revealed upgraded midterm targets at its Capital Markets Day that appear achievable and had already been broadly incorporated into our forecasts. Turnaround specialist Bjorn Rosengren has successfully executed on his strategy implemented in 2020, raising profitability through improved cost measures and portfolio management. With a solid foundation in place, the group will now focus on growth, having underperformed its Cap Goods peer group. While financial targets were upgraded, we still believe peers such as Schneider Electric enjoy a superior outlook to due their more extensive digital offerings. We maintain our CHF 36.5 fair value estimate for ABB and view shares as fairly valued.

Wide-moat ABB reported operating profit growth of 13% during the third quarter, translating into margin expansion of 80 basis points to 17.4%, reflecting the group’s strong pricing power and the ongoing turnaround under CEO Björn Rosengren. Shares were down 5% on Oct. 18, which we attribute to weak fourth-quarter EBITA margin guidance of 16%. Management cited typical business seasonality as the reason for the sequentially lower guidance. We believe its reasoning appears fair, given the same scenario has been occurring historically at the business. Full-year EBITA margin guidance of 16.5%-17% falls within our estimates and thus we think the market movement is an overreaction. We reiterate our CHF 36.50 fair value estimate and view shares as undervalued. However, we prefer Siemens due to its larger discount to our fair value estimate and superior long-term outlook.

We raise our fair value estimate to CHF 36.5 from CHF 35.0 per share for wide-moat ABB, underpinned by its shift toward a decentralized business model that will support structurally higher profitability and better reflects its underlying competitive advantages. The appointment of CEO Bjorn Rosengren, a turnaround specialist, has coincided with an increase in profitability through improved cost measures and active portfolio management. Shares are trading at a slight discount to our revised fair value estimate, but we require a greater margin of safety, especially since both Siemens and Schneider enjoy a superior outlook.

ABB enjoys a number one or two market position in two thirds of its product segments, which is largely derived from centuries of deep-domain expertise in supplying mission-critical equipment with a high cost of failure for a variety of end markets. Its wide range of product categories and operating businesses have led to several costly restructuring programs and underperformance versus its European Capital Goods peers, due to the complexity of the organization. The divestment of its capital-intensive Power Grids business and the appointment to CEO of turnaround specialist Bjorn Rosengren have helped simplify the group through decentralization and active portfolio management, and subsequently improved the profitability of the business, already exceeding its target EBITA margin of at least 15%. With approximately 20 business divisions remaining in the group, further portfolio optimization remains an option.

Wide-moat ABB delivered impressive EBITA growth of 26% year over year, approximately double the rate of revenue growth during the same period last year. Execution of its order backlog combined with mid-single-digit price increases contributed to the strong performance and highlights the mission-critical nature and high switching costs of the group's products. All operating segments were able to report EBITA margin expansion; the group EBITA margin expanded 200 basis points to a record 17.5% for this quarter. While management announced that it expects full-year EBITA margins to exceed 16%, expectations had already been baked into consensus expectations. Organic order growth of 2%, from an already high level and a book/bill ratio above 1 times, likely indicate that the group can maintain its robust performance. We reiterate our $37 fair value estimate and view shares as fairly valued.

Wide-moat ABB reported organic order growth of 9% to $9.45 billion during the first quarter, significantly above company-compiled consensus of $8.40 billion, which highlights the mission-critical nature and high switching costs of the group’s products, alleviating investor concerns about an economic downturn hitting the business (at least for the time being). Organic revenue growth of 22% was broad-based across operating segments, driven by the execution of its order backlog without any supply chain constraints and spillover effects of price increases implemented last year. A book/bill ratio of 1.20 times is a likely indicator that revenue growth is likely to persist (despite weakness in the residential end market) and has given management confidence to raise full-year organic revenue guidance to at least 10%, a substantial increase from initial expectations of 5%. While we plan to revise our forecasts for the better-than expected start to the year, we don’t expect a meaningful change to our investment recommendation, underpinned by our $37 fair value estimate, which we maintain. Shares are fairly valued.

ABB generates around 40% of its revenue from electrical equipment and around 40% from industrial automation products. While it has low exposure to faster-growing software, it has a fast-growing robotics business, where it is the number-two global supplier; this contributes around 9% of revenue. We project 4% medium-term revenue growth for ABB.

ABB's full-year 2022 results were broadly in line with our expectations with revenue in line and EPS slightly above our forecast due to items below the operating income line. Free cash flow was lower than our forecasts due to above-normal inventory levels to manage high order growth against supply chain challenges. We continue to see medium-term demand prospects, supported by ABB’s customers investing in energy management and automation solutions. We retain our wide moat rating and $35 fair value estimate.

We maintain our wide moat rating and fair value estimate on ABB, which reported a strong set of third-quarter results on growth and margins. Book to bill across all business areas was around 1.10 times. However, from a growth and profitability standpoint, the electrification and motion business areas were really the stars of the quarter. Both posted 20% or better order and revenue growth versus 7% and 13% for the group for growth in revenue and orders, respectively. Within ABB, these two business areas are also the more profitable.

ABB posted solid second-quarter results, with a book/bill above 1 times—at 1.2—showing a still-robust demand picture. The Chinese residential property sector was one of the few end markets showing weakness, but government directives played a role there. Revenue in China declined 5%, hurt by the pandemic lockdowns. Price increases were the key driver of 6% organic revenue growth in the quarter, with volume growth of just 1%. Underlying volume growth would have been stronger if the robotics division had fewer semiconductor delivery issues. Robotics and discrete automation division revenue was down 5% organically year over year, hampered by chip shortages. Meanwhile, 23% organic order growth for the division conveys a far more robust robotics demand picture. Management expects some relief in semiconductor chip supply in the second half of the year. We maintain our wide moat rating and CHF 35 fair value estimate.

ABB shares look attractive after declining 15% since mid-March. We are maintaining our wide moat rating and CHF 35 fair value estimate. The company recently announced the delay of its e-mobility unit's initial public offering due to less favorable capital market conditions. The e-mobility unit is less than 2% of group revenue and is not the central part of our investment case. Our cash flow forecasts and company valuation depend more on the outlook for the ABB's restructuring execution as well as broad industrial demand for electrification components and automation equipment, including robotics. We see no change in the medium-term drivers for these. However, we are factoring in near-term slower demand from macro headwinds, mainly in our 2023 forecasts. With outsize demand since mid-2021, we factor in a cooling off of order and revenue growth in 2023, resulting in a reduction in our revenue growth assumption by around 100 basis points to 4% in 2023. Our 2022 forecasts are largely in line with company-provided consensus, but our 2023 EBITA operating forecast is around 4% below consensus.

ABB generates around 40% of its revenue from electrical equipment and around 40% from industrial automation products. While it has low exposure to faster-growing software, it has a fast-growing robotics business, where it is the number-two global supplier; this contributes around 9% of revenue. We project 4% medium-term revenue growth for ABB.

ABB's shares offer around 9% upside to our CHF 35 fair value estimate. Fourth-quarter and full-year results were in line with our expectations. ABB reported 17% and 8% organic order and revenue growth, respectively, for the full year. Higher plant utilization rates, price increases and productivity gains from the restructuring program boosted the group-adjusted EBITA margin by 310 basis points to 14.2% for 2021. In the medium term, demand for electrification and automation solutions and ongoing restructuring, so far credibly executed, leads us to a 9% CAGR forecast for operating profits over the next three years. We maintain our wide moat rating.

ABB's third-quarter revenue was suppressed by supply chain shortages; however, previous price increases contributed to margin expansion in the face of input cost inflation and low volume. We believe the shares are trading at attractive levels and we're maintaining our fair value estimate and wide moat rating. Supply chain constraints led a striking gap between organic order and revenue growth in the quarter (26% orders, 4% revenue) with the company unable to fulfil part of its demand due to component shortages. Importantly, some of the outsize order growth likely contained some safety stocking from customers. With supply chain constraints expected to continue for the rest of the year, management lowered full-year organic revenue guidance to a range of 6%-8%, from the previous "just below 10%" guidance. Early price increases, particularly in the electrification and motion divisions, and a volume rebound in the process automation division led to an impressive year-over-year gross margin expansion of 470 basis points. As a result, the EBITA margin improved by 310 basis points to 15.10%. Once supply chain constraints start to ease, we expect margins will continue to improve with business able to fulfil volume demand at a normalized pace again. We expect the company's price increases taken in the past several months to stick and add support to margins. Overall, management's midterm EBITA margin target of 13%-16% looks comfortably within reach, even at the upper end.