ABB Earnings: We Believe Disappointing Margin Guidance Will Be Temporary; Maintain Our Fair Value

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.