ABB Ltd. (ABBN), the world’s largest maker of power-distribution equipment, fell the most in three months after reporting earnings that missed estimates and saying that tight pricing will weigh on profitability in the first quarter.
“We are sacrificing part of the margin to invest for the future,” Chief Financial Officer Michel Demare said at a press conference today in Zurich. “We are not maximizing profit in the short term.”
Profit rose 19 percent to $830 million in the fourth quarter, the Zurich-based company said today, falling short of the average estimate for $935.9 million from analysts surveyed by Bloomberg. Operational earnings before interest, taxes, depreciation and amortization fell in four of five of ABB’s main businesses, as a proportion of sales.
ABB’s sales rose for a fifth consecutive quarter after Chief Executive Officer Joe Hogan bolstered the Swiss engineering company with three acquisitions exceeding $1 billion since 2010. While “macroeconomic volatility” makes short-term predictions challenging, Hogan said North America is recovering and China is returning to growth.
The shares declined as much 4.8 percent, the sharpest drop since Nov. 1, and were down 3.9 percent at 19.15 francs at 10:57 a.m. in Zurich. That pared the stock’s gain this year to 8.3 percent.
“For earnings, it’s a miss, and the first quarter is not going to be stellar either,” said Sjoerd Ummels, an analyst at ING Groep NV in Brussels.
ABB’s “deteriorating margins” were caused by “pricing pressure” related to its mix of contracts, CFO Demare said, without elaborating.
So-called base orders, contracts below $15 million which form the bulk of new business at ABB, rose 12 percent in the quarter. Large orders advanced 38 percent and made up 23 percent of the total, compared with 20 percent a year earlier. ABB invested an extra $385 million in 2011 in research and development, and sales expenses, Demare said.
“An unfavorable mix and price pressure will likely weigh on profit margins in the first quarter, but we are more optimistic about the rest of the year and will continue to aggressively pursue growth,” CEO Hogan said in a statement.
Operational earnings rose 18 percent in the quarter to $1.59 billion, with Baldor Electric Co. contributing $525 million, or one-third. Sales gained 15 percent to $10.57 billion, exceeding an estimate for $10.25 billion.
“We saw good demand for energy efficiency solutions in industry and for grid expansions and refurbishment, and we expect that to continue,” Hogan said.
ABB cut about $330 million in costs in the quarter, bringing total savings for 2011 to $1.1 billion, ahead of a goal to save $1 billion. Hogan reiterated plans to wring an additional $1 billion in savings out of ABB in 2012.
ABB plans to pay investors a dividend of 0.65 Swiss francs a share, compared with a prediction of 0.70 francs by Bloomberg.
The profit margin rose in power systems after ABB had project-related costs for the cables business in 2010. Order intake in that unit rose 19 percent, driven by an ultra high- voltage transmission system in India and a cable order in Sweden. Orders advanced 7 percent in process automation, on spending by the oil and gas industries.
“Our hope is that we start to see a bottoming of this price pressure that we’ve seen over the past two or three years,” Hogan said today in a video, referring to power products. “The long-cycle nature of this business would indicate that this is going to occur soon.”
ING Groep’s Ummels has a “buy” recommendation on ABB shares and predicts they will rise to 21 francs within a year.
ABB must make sure it takes its time “to digest what we acquired,” while the company will continue to seek companies to purchase, Hogan said.
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