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ABB Q1 Earnings Trump Estimates, Markets Stabilizing


ABB Ltd. ABB reported operational earnings per share of 28 cents, flat year over year and higher than the Zacks Consensus Estimate of 26 cents. Steady revenues and diligent cost-saving initiatives helped maintain earnings; however, this was somewhat offset by tough macroeconomic and geopolitical conditions which ultimately affected revenues. However, earnings beat the Zacks Consensus Estimate of 25 cents.

Investors cheered the beat, as ABB’s shares were up 2.4% on one point in pre-market trading.

Quarterly revenues were up 3% year over year and came in at $7,854 million. Individually, revenues witnessed growth in three of the four segments of the company, thus boosting the overall top line. Revenues also came ahead of the Zacks Consensus Estimate of $7,613 million.

Revenue by Segments

Electrification Products (up 3% year over year in comparable terms to $2,293 million): Improved market demand in the U.S., China and Germany supported revenues.Improved volume, better product mix and higher productivity drove revenues for the segment. Orders were up 4% year over year to $2,528 million.

Robotics and Motion (up 5% to $1,926 million): Sales remained steady on strong demand trends in robotics and the light industry. Orders of this segment moved up 7% year over year to $2,177 million on a year-over-year basis, driven by continued strong demand patterns in robotics and light industry.

Industrial Automation (down 5% to $1,549 million): Revenues remained on a downtrend in this segment, particularly due to declines in discretionary spending in oil & gas, and related sectors. Orders continued their bleak trend as they declined 6% year over year to $1,682 million, owing to lesser number of large orders related to specialty vessels. Lower capital spending in process industries and constrained discretionary spending in process industries continue to harm this segment.

Power Grids (up 4% to $2,405 million): Steady execution of a healthy order backlog and solid project execution drove revenues. However, orders declined 17% to $2,379 million mainly due to the timing of large contract awards. The segment is still seeing soft demand in the Middle East.

Total orders fell 9% year over year at $8,403 million and were down 3% on a comparable basis, dragged by lesser number of large contract awards, particularly in Industrial Automation and Power Grids. Base orders grew 2% on a year-over-year basis, while large orders fell 34%. The order backlog at quarter end amounted to $23 billion (down 2% year over year).

On a geographic basis, demand was positive in the European countries, with moderate overall growth and good timing of large capital investments. Orders displayed good growth in the Americas, driven by increased demand for automation and energy efficiency. The U.S. grew 5% in total orders, offsetting declines in Canada and Brazil. The Asia, Middle East and Africa (AMEA) witnessed mixed performance, with order growth in India, South Korea and the UAE, which were offset by order declines in China and Saudi Arabia.

Book-to-bill ratio at the end of the first quarter was 1.07, up from 1.17 in the comparable quarter a year ago.

Operational earnings before interest, taxes and amortization (“Operational EBITA”) in the quarter under review rose 2% year over year to $943 million.

Next Level Strategy: Stage 3

In third-quarter 2016, ABB launched the third stage of the revamped version of its “Next Level Strategy” which focuses on three areas, namely profitable growth, relentless execution and business-led collaboration. This stage calls for restructuring the company’s divisions into four market-leading entrepreneurial businesses, unlocking its full digital potential, increasing momentum in operational excellence and boosting the company’s brand.

ABB restructured its business into four segments: Electrification Products, Robotics and Motion, Industrial Automation and Power Grids, effective from Jan 1, 2017. This restructuring will help in increasing its focus on higher growth segments, strengthening its competitiveness and de-risking the portfolio.

Further, in order to unlock its digital capabilities, ABB had announced a strategic partnership with Microsoft Corp. MSFT, to shore up its capabilities in the industrial internet market, by combining cloud technology with industrial digital technology. Together, the companies will develop next-generation digital solutions on an integrated open cloud platform.

ABB is optimistic about the White-Collar Productivity savings program, which has surpassed expectations since its launch. Consequently, the company raised the cost-reduction target under the program by 30% to $1.3 billion. In addition, ABB is currently implementing its regular cost-savings programs to achieve savings equivalent to 3–5% of cost of sales each year. Another transition which the company is launching is to adopt a single corporate brand, by consolidating all its brands across the world under a single umbrella.

ABB Ltd Price, Consensus and EPS Surprise

Liquidity & Cash Flows

ABB’s cash and cash equivalents as of Mar 31, 2017 were $5,562 million compared with $3,644 million as of Dec 31, 2016. Total long-term debt rose to $5,885 million at the quarter end, from $5,800 million as of Dec 31, 2016.

ABB’s cash flow from operating activities came in at $509 million for the first quarter compared with $252 million in first-quarter 2015. The decline reflected the delay of incentive payments caused by the South Korea case.

Divestitures and Partnerships

During third-quarter 2016, ABB decided to sell its global high-voltage cable system business to NKT Cables in a deal worth $934 million. ABB and NKT Cables also signed an agreement for a long-term strategic partnership, under which they will work together on future projects, in areas like sub-sea interconnections and direct current transmission links.

ABB considered the offloaded unit as a niche business, which had been improving in recent times. However, the company is facing what will likely be the end to Europe's offshore wind-power boom years, as the industry grapples with shrinking investments and uncertainty over future subsidies. At the heart of it, the cables deal is part of ABB’s active portfolio management and will make the core power grids business simpler, stronger, and more focused.

Alongside, ABB also announced two important partnerships. It signed a partnership deal with engineering and construction firm, Fluor Corporation FLR. The deal was signed to cater to the growing needs of power grids worldwide for safe, dependable and state-of-the-art electrical substations. Through the strategic partnership, ABB and Fluor will execute large turnkey engineering, procurement, construction (“EPC”) electrical substation projects.

Further, ABB formed an agreement to partner with Aibel to deliver offshore wind integration solutions. Per the contract, Aibel will be responsible for turnkey EPC services for the design, construction, installation and commissioning of the offshore platforms; while ABB will focus on high-voltage direct current technology.

Per ABB, the two new alliances, in addition to greater focus on higher-margin consultancy services and software, will help elevate the Power Grids unit’s margin target to 10–14% (up from a previous target of 8–12%).

Earlier this month, ABB announced the acquisition of B&R, a leader in machine and factory automation. The B&R acquisition will help ABB bridge the gap in machine and factory automation.

Share Repurchase

At the end of third-quarter 2016, ABB declared the completion of the $4-billion share buyback program introduced in Sep 2014. Under the program, the company repurchased approximately 171.3 million shares for about $3.5 billion.

Consequently, ABB announced a new share buyback program of up to $3 billion from 2017 through 2019, reflecting consistent strength in cash generation and financial position.

To Conclude

ABB is facing a mixed macroeconomic and geopolitical climate, as U.S. and China remain buoyant amid modest global growth and heightened uncertainties. Lower capital spending for ABB’s key upstream energy end-markets and foreign exchange volatility will likely continue to hurt its financials. The company is vulnerable to increased uncertainty, stemming from the Brexit decision as well as geopolitical tensions elsewhere in the world, which are overshadowing global markets.

Despite the negatives, we believe that the company’s long-term prospects are stable. The company’s three major customers in utilities, industry, and transport & infrastructure are likely to drive growth. Apart from this, positive development in electricity value chain, rapid progress of Internet of things, services and people and a surge in energy-efficient transport and infrastructure bode well.

Zacks Rank & Stocks to Consider

ABB currently carries a Zacks Rank #3 (Hold). A better-ranked company in the same space as ABB is EnerSys ENS, carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

EnerSys has an impressive earnings history, with a positive average surprise of over 4.4% for the four trailing quarters, driven by four consecutive beats.

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