ABB: A ‘Steady Eddy’ Stock for Turbulent Times

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ABB (ABB) isn’t a “sexy” investment, and in fact, most people haven’t even heard of it … but it’s an appealing choice for investors who currently seek a safe harbor amid choppy market seas.

ABB Group 185Zurich-based ABB is an industrial machine and electrical equipment manufacturer for utilities and industrial customers around the world. The company operates in five divisions that provide an eclectic combination of revenue streams: Power Products, Power Systems, Discrete Automation and Motion, Low Voltage Products, and Process Automation.

This company is so pervasive it’s almost a proxy for global capitalism. It’s an old-line industrial company, but it’s also making a big push into the booming field of robotics.

ABB generates roughly 50% of total revenue from late-cycle businesses that typically shine during the latter stages of economic recovery, notably utilities. That’s an appealing trait for investors who are encouraged by economic recovery but jittery about market volatility and the global economy’s fragility.

Over the past year, ABB has raised more than $1 billion from the sale of five businesses. ABB announced that it would also sell off its steel structures business for about $600 million. The all-cash transaction is likely to be closed in the third quarter of 2014.

The company now plans to return some of the cash from division sales to investors, in the form of a $4 billion stock buyback program over the next two years.

With a market cap of $46.7 billion, ABB heavily emphasizes research and development, with a focus on the booming field of robotics. This investment should pay off over the long haul, as manufacturers of all stripes increasingly replace more expensive humans with robots to run their factories and processes.

For the second quarter, ABB’s earnings per share came in at 28 cents, a decline of 15.2% from the same period a year ago. However, this decline is mostly attributable to weakness in its Power Systems segment, due to continued sluggishness in major markets such as Europe.

However, growing government investment in infrastructure in countries such as China, India and Brazil should benefit ABB in future quarters. China in particular is a major ABB customer, as the country’s economic planners hike domestic spending to stimulate growth and urbanize the rural countryside. Construction’s recovery in North America should also boost ABB for the rest of 2014 and beyond.

In September, management asserted that it expected the company’s revenue to grow 4% to 7% annually on a year-over-year basis from 2015 to 2020, faster than most forecasts for global economic growth.

Meanwhile, the company is slightly undervalued compared to its sectormates. The company’s trailing 12-month price-to-earnings ratio is only 18.4, compared to a P/E of 22.7 for its peers in diversified machinery.

ABB is a rare combination of basic manufacturing prowess with leading-edge technological innovation, helping assure that this industrial stalwart doesn’t fall victim to disruptive technology. Meanwhile, its diverse source of revenue from a broad mix of industries helps cushion the stock from unexpected declines in any single industrial niche.

This cushion is valuable in an overbought market that seems to be in search of a catalyst for correction.

As of this writing, John Persinos did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/abb-steady-eddy-stock-turbulent-times/.

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