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Share tips: Swiss innovation going cheap
With state-of-the-art technology across a broad range of territories, this power-grid maker gets the thumbs up from Paul Hill.
The recent equity sell-off has forced speculators to dump stocks on to the market at distressed levels. For long-term investors, this creates opportunities. Take ABB, Switzerland's power transmission and factory automation champion. It is the world's largest maker of electricity grids and a leader in high-voltage direct current (HVDC) which can significantly reduce power loss over transmission lines.
However, its shares have dropped 30% in the past year even though it has no credit worries. In May it issued $1.25bn of ten-year paper offering a yield just shy of 3%. That's less than half the level being paid by Italy and Spain.
What's more, the fundamentals are rock solid. Developing countries need to build infrastructure whilst developed ones are updating theirs to lift energy efficiency. ABB is also winning work from smaller rivals as customers migrate to the stronger players it is very difficult to compete in this space without global scale, established brands and lean supply chains.
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So, in quarter one turnover was up 6%, led by a 15% jump in discrete automation/ motion, 12% in services and 9% in power products. The order book closed in March at a near-record high of $29.9bn. That said, demand around the Mediterranean is weak, and margins in its Chinese arm are being hit by falling prices.
However, a resurgent North America has offset these problems. Cost savings of $262m thanks to better sourcing and productivity have also helped. CEO Joe Hogan said he was aiming for profitable growth in 2012 and a rise in the operating margin from 11.8% last year. Greater investment in innovation should also boost profits.
For 2012 the City is forecasting revenues and earnings per share (EPS) of $37.1bn and $1.40 respectively, rising to $40.9bn and $1.50 in 2013. That puts the shares on a price/earnings (p/e) ratio of 11.5. I would value the group on an EBITA multiple of 11. Adjusting for the net cash of $1.4bn (as at March) and $1.5bn pension deficit generates an intrinsic worth of SFR22 per share. With state-of-the-art technology across a broad range of territories, ABB gets the thumbs up from me.
William Blair has a price target of SFR24; second-quarter results are due on 26 July.
Rating: BUY at SFR15.60
Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI or phone 020-7633 3634 for more.
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Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.
Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.
Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.
