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

Wide-moat ABB ABBN 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.

Organic order intake grew 2% during the third quarter, supported by a large order in the process automation segment. Geographically, double-digit order growth in the U.S. mitigated a 13% decline in orders in Europe and declining demand for robotics in China. Despite organic revenue growing 11% in the quarter, ABB’s book/bill ratio remains above 1.0 times, which suggest its order backlog will continue to support future revenue growth. Price increases implemented this year also suggests it can protect its current level of profitability. We believe management is likely to raise its current 15% medium-term EBITA margin guidance at its capital markets day in November.