In this era of globalization, companies willing to expand their reach across oceans can uncover bountiful profits in unexpected places. Tapping into the demand of a foreign market is a risk, but it’s simply a matter of knowing where to look.
ABB’s (ABB) CEO Ulrich Spiesshofer clearly has a keen eye for where to plant seeds of innovation, as his company is currently reaping the benefits of playing into the Asian industrial market.
Swiss-based ABB is a global leader in providing power and automation technologies that improve performance while lowering the environmental impact to customers in the utility, industrial, and transportation and infrastructure sectors. The company manufactures a broad range of products, systems, solutions and services, each of which are designed to boost productivity, increase power reliability and enhance energy efficiency.
ABB Is a Global Powerhouse
And it continues to expand its global reach. ABB recently announced the introduction of a new manufacturing facility for medium-voltage air-insulated switchgears (“AIS”) in Tangerang, Indonesia, just a stone’s throw away from the country’s capital city of Jakarta.
Now ranked fourth in countries with the highest populations, Indonesia has become a hub of economic activity, as a rapidly expanding industrial sector has called for higher demand for electricity nationwide. ABB’s new facility taps right into that demand, allowing for more reliable and efficient power distribution.
While the expansion news adds to the company’s attractiveness, it had already been on my radar as a source of strength amid the end-of-summer market turmoil. I recommended the stock in my Value Authority service in late September, and since then share prices have steadily moved higher from recent lows around $17.
That two-week 7% return reflects not only the strong environment for industrial companies, but also the pressure being put on ABB to lower costs and improve returns. Specifically, that pressure comes from Swedish activist investor Christer Gardell, whose management firm owns more than 3% of the company.
Another nod to its global perspective is last year’s large order wins for high-voltage direct current (HVDC) power transmission in the United Kingdom and Canada that will link remote renewable energy sources to existing grids. Also in 2014, ABB won an order from Brazilian mining company Vale (VALE) to install electrical and automation systems at an iron ore mine. The systems will help Vale support its development of a sustainable “mine of the future” with truck-less transportation systems powered through intelligent digital substations.
In addition, the company was able to lock in a large contract from Norway’s Statoil (STO) to provide telecommunications systems used to remotely monitor and control offshore oil and gas platforms.
ABB Stock Has Significant Growth Potential
While it already has a dominant position within its industry, there are significant growth opportunities ahead for ABB, including those in alternative energy sources such as wind and solar. These sources of power are often located far from the centers of consumption, and because they increase the number of feed-in points in a grid, they tend to create instability and increased grid complexity. However, ABB’s high-efficiency power transmission and intelligent grid solutions help customers address these challenges.
To help add earnings growth, last September, ABB initiated its “Next Level” strategy, which focuses on accelerating organic growth momentum, margin accretion and enhanced capital efficiency to deliver greater value to its shareholders. Earlier that month, management announced that the company is entering Phase 2. The program will realign its operations in order to cut one of its current five divisions and aim for cost savings of $1 billion per year by the end of 2017.
With a strong balance sheet with net debt of $2.8 billion and just 20% equity, ABB has the flexible financial ability and cash flow generation necessary to pay its healthy 4.5% dividend, finish carrying out the remaining $2.2 billion worth of its $4 billion share buyback program, and be more aggressive in mergers and acquisitions activities.
While we’ll remain mindful of the economic situation in Europe, we’re already reaping the benefits of this global value play in Value Authority, and I expect the stock to make more money for my subscribers as its focus on globalization and maximizing operations efficiency will keep it well ahead of the curve.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
