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ABB's Q3 Earnings & Revenues Trump Estimates, Shares Up

ABB Ltd. ABB reported operational earnings per share of 34 cents for third-quarter 2017, up 4% year over year, beating the Zacks Consensus Estimate of 30 cents by 13.3%. Strong top-line growth and diligent cost-saving initiatives helped maintain earnings.

Investors cheered the impressive earnings and revenue growth, taking ABB’s shares up 3.1% at one point in pre-market trading.

Quarterly revenues were up 6% year over year in comparable terms, came in at $8,724 million, trumping the Zacks Consensus Estimate of $8,499 million. Individually, revenues witnessed growth in three of the four segments of the company, with growth in Electrification Products, Robotics and Motion, and Industrial Automation, more than offsetting minor contraction in Power Grids growth.

Revenue in Segments

Electrification Products (up 5% year over year in comparable terms to $2,596 million): Orders were up 7% year over year to $2,547 million, driven by positive construction and utility demand, particularly in the AMEA region.

Robotics and Motion (up 8% to $2,201 million): Sales grew steadily on solid demand trends in robotics and energy-efficient solutions in the automotive and general industry sectors. Orders of this segment moved up 4% year over year to $2,032 million on a year-over-year basis, backed by continued strong demand patterns in robotics and light industry.

Industrial Automation (up 1% to $1,804 million): Orders continued to be steady after witnessing the recent negative trend, rising 14% year over year to $1,654 million, owing to selective capital expenditure investments in cruise and specialty vessels, and mining.

Power Grids (flat at $2,533 million): Steady execution of a healthy order backlog and good project execution kept revenues steady. Orders declined 6% to $2,244 million mainly due to the timing of large contract awards and continued selectivity driven by change in business model.

Total orders were up 8% year over year at $8,157 million and increased 5% on a comparable basis, reflecting solid base order development across most regions and divisions. Base orders grew 6% on a year-over-year basis, while large orders were down 5%, mirroring the change in the company’s business model. The order backlog at quarter end amounted to $23.4 billion (down 1% 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 sound growth in the Americas as well, fueledby increased demand for automation and energy efficient solutions. The United States grew 6% in total orders. The Asia, Middle East and Africa (AMEA) region witnessed a mixed performance, with substantial order growth in UAE, South Africa and Australia, which were slightly offset by order declines in China.

Book-to-bill ratio at the end of the reported quarter was 0.94, up from 0.91 recorded in the comparable quarter a year ago.

Operational earnings before interest, taxes and amortization (“Operational EBITA”) in the quarter under review rose 3% year over year in comparable terms to $1,124 million. The figure was driven by the positive net savings effect and volume contribution, which was partially offset by commodity price escalation and investments in growth and business transformation.

ABB Ltd Price, Consensus and EPS Surprise


Next Level Strategy: Stage 3

In third-quarter 2016, ABB had 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, accelarating momentum in operational excellence and enhancing 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 increase the company’s 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 Corporation 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.

During the reported quarter, ABB continued the implementation of this strategy by shifting its core operations to higher growth segments, boosting its competitiveness and de-risking the portfolio.

Moreover, ABB is optimistic about the White-Collar Productivity savings program, which has surpassed expectations since its inception. The company is on track to achieve the cost-reduction target under the program of $1.3 billion within the decided timeframe. Also, ABB now projects to incur about $240 million lower combined restructuring program and implementation costs than initially expected. The company is currently implementing its regular cost-saving programs to achieve savings equivalent to 3-5% of cost of sales each year.

Liquidity & Cash Flows

ABB’s cash and cash equivalents as of Sep 30, 2017, were $3,649 million compared with $3,644 million as of Dec 31, 2016. Total long-term debt rose to $7,061 million at the quarter end from $5,800 million as of Dec 31, 2016.

ABB’s cash flow from operating activities came in at $954 million for the third quarter compared with $1,081 million in third-quarter 2016. The decline underlined higher current trade receivables related to additional revenues that were billed in the quarter, as well as the build-up of inventory to serve growth.

Divestitures, Acquisitions 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. 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. The company signed a partnership deal with engineering and construction firm, Fluor Corporation FLR. Through the strategic partnership, ABB and Fluor will execute large turnkey engineering, procurement, construction (“EPC”) electrical substation projects. Furthermore, ABB formed an agreement to partner with Aibel to deliver offshore wind integration solutions.

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%).

During the quarter, ABB closed its acquisition of B&R — an independent provider dealing in product- and software-based, open-architecture solutions for machine and factory automation globally. This buyout will bridge the gap in machine and factory automation which ABB has been facing, and create an exclusive, comprehensive automation portfolio for clients across the world. ABB expects this acquisition to be accretive to earnings in the first year.

In addition to this, ABB announced that it has agreed to acquire the data transmission business of the KEYMILE Group. This buyout will enable the company to expand its communication networks business footprint in the industrial, transportation and infrastructure domains. It will add reliable communications technology offerings to ABB’s diverse portfolio, helping it fortify its foothold in digital electrical grids.

These buyouts will help accelerate ABB’s operational momentum.

Share Repurchase

At the end of third-quarter 2016, ABB announced completion of the $4-billion share buyback program introduced in September 2014. Under the program, the company repurchased approximately 171.3 million shares for about $3.5 billion. Consequently, ABB had announced a new share buyback program of up to $3 billion from 2017 through 2019, highlighting consistent strength in cash generation and financial position.

As the GE Industrial Solutions transaction (discussed below) is in progress, ABB has decided to put its previously-announced planned share buyback program on hold.

To Conclude

ABB is facing a mixed macroeconomic and geopolitical climate, as the United States and China remain buoyant amid modest global growth and heightened uncertainties. Europe is also witnessing some positive trends. Nevertheless, lower capital spending for the company’s key upstream energy end-markets and foreign exchange volatility might continue to hurt its financials. The company is vulnerable to heightened 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 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, encouraging 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.

Moreover, we look favourably upon ABB’s recent $2.6 billion deal to acquire General Electric Company’s GE global electrification solutions business. This acquisition will enable the integration of ABB’s Electrification Products division into GE Industrial Solutions, resulting in a unique global portfolio and a complete offering for North American as well as global customers. The deal has significant value creation potential and will expand ABB’s installed base considerably.

ABB currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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