Analyst Note| Denise Molina, CFA |
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.