Friday, December 12, 2008

ABB: A Look at Electricity Infrastructure

Swiss industrial electrical giant ABB (ABB) is at the heart of the infrastructure discussion right now. They also should be at the heart of discussion of solutions for energy efficiency and sustainability. The combination of the two puts ABB in a great position moving forward.

A bit about the company:

-ABB is a leader in power and automation technologies that enable utility and industry customers to improve performance while lowering environmental impact. The ABB Group of companies operates in around 100 countries and employs about 120,000 people.

They operate in five segments: Power products, power systems, automation products, process automation, and robotics. Click here for a description of each.

ABB has attracted a lot of attention within the past couple of years because of its global reach, particularly in emerging markets. According to their website, in Q3 of 2008 orders were broken down in this fashion:

  • Europe 43%
  • Asia 28%
  • Americas 21%
  • Middle East and Africa 8%
Here's a presentation from the company with more detail (pdf).

Positives for the company:

  1. Their businesses are in industries where there is currently a lot of focus among governments and private corporations. Governments are trying to replace old power grids and promote energy efficiency through stimulus spending and tax credits. Private corporations and utilities are spending money on alternative energy products like solar and wind power and need solutions from companies like ABB to pull these projects together.
  2. Their growth is coming from emerging economies. Many are cash rich and have growing populations with a consistent need for these products.
  3. The U.S. is likely to build or upgrade their power grid to integrate alternative energy products and increase efficiency. ABB is likely to play some role in this, and it could be a large one. Another stock that could play a role is Quanta Services (PWR). Obama's likely energy department head has already pitched the idea:
-How about renewable energy? Dr. Chu already had a taste of Washington power-brokering, in a briefing with current Energy Secretary Samuel Bodman and Treasury Secretary Hank Paulson. He pitched them on the idea of an interstate electricity transmission system to be paid for by ratepayers. That would solve one of the biggest hurdles to wide-spread adoption of clean energy like wind and solar power.

Here are some links with more detail on this potential project:

WSJ Enironmental Capital Blog Post.
Common Tragedies Blog Post.

Negatives for the company:

  1. We are in what appears to be a significant recession. Funding for additional projects typically gets cut off during economic slowdowns. There is no evidence that growth won't slowdown for ABB.
  2. Emerging economies haven't been spared by what was thought to be a "US problem." Many emerging countries are seeing economic slowdowns as strong or worse than the U.S.
  3. Energy prices have dropped. Funding for alternative energy projects might get shelved with fuel prices falling across the board.
Some notes about the stock:

The stock hasn't been spared during the recent economic turmoil. It was slashed from a high of $33 earlier this year to around $10. It has rallied a bit in the past week with other infrastructure stocks after Obama's preliminary plan was announced.

They have a lot of cash on the balance sheet and should have no problems weathering the economic turmoil.

Earnings are expected to be flat with estimates for 2008 being $1.67 and 2009 being $1.65. They could rise substantially if the economy recovers in 2009, and could see a boost from infrastructure spending in the U.S.

Valuation wise, the stock is cheap. Its trading at less than 7x 2008 earnings.

I think the stock is a good buy at current levels. To me it is more attractive than its competitors, GE (GE) and Siemens (SI), as both have some problems right now. GE has a lot of financial exposure and isn't a direct play on the industry like ABB. Siemens is facing some profitability issues and needs some re-structuring. I'd take a look at Quanta Services, but the stock carries a pretty good premium at 22x earnings. Overall, I like ABB the best in this industry.

Disclosure: Long ABB

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