ABB's Splitting Headache
With robots poised to steal our jobs and renewable energy transforming our electricity networks, you'd expect electrical engineer ABB to be riding high.
Instead, the Swiss maker of industrial automatons, vehicle charging-stations and power grid equipment is struggling against various headwinds. It needs a more convincing plan to head off calls to break itself up.
With dividends reinvested, the shares have returned a negative 12 percent since Ulrich Spiesshofer became CEO in September 2013, lagging European industrial peers. (The Swiss franc's appreciation meant less pain for those who bought shares in euros).
Like rivals, ABB is struggling with weak demand from oil and gas and utility customers. It also reports in dollars, not much help when you're converting sales from weaker currencies. ABB's emerging market exposure, including China, is another drag.
It cut another percentage point from its 2015-2020 revenue growth forecast in September. But even a revised 3-6 percent average yearly goal looks ambitious. Currency-adjusted orders and revenues stagnated in 2015 but fell sharply in US dollar terms (by 12 percent and 11 percent). Sales will drop 0.8 percent in 2016 and grow only 3 percent in 2017, according to the Bloomberg consensus. That makes it even harder for the company to lift profit. ABB targets an average operating Ebita margin of 11-16 percent for the years until 2020, and achieved 11.8 percent in 2015 -- fairly respectable in the circumstances.
Stagnating revenue and sub-optimal profit have prompted calls for action, including the drastic kind. Activist investor Cevian, a 5.2 percent shareholder, has floated splitting the group into three companies, according to Bloomberg News.
Unlocking "hidden" value from industrial conglomerates is in vogue. GE is exiting most of its US finance operations, Philips is separating from lighting and analysts think Siemens might spin off healthcare.
There are, nonetheless, good arguments why ABB may be as valuable together as apart. JP Morgan analysts note that it frequently cross-sells power and automation services. Plus breaking up would be expensive.
Spiesshofer has chosen a less radical path. He's slimming the company down from five to four divisions and reviewing the power grids division. A competitor to Siemens and GE, the unit generated $11.6 billion revenue in 2015 (almost a third of the group total) but had a 7.5 percent ebita margin -- little more than half the automation division's.
If ABB can't lift that, a sale, possibly to a Chinese buyer such as State Grid, might be sensible. But Spiesshofer shouldn't rush. Although power grids' revenue fell last year, the margin improved. And while Europe's utilities aren't spending now, ABB would look foolish if the development of smart grids led to a sustained profit recovery. History urges caution: ABB flirted with selling its then loss-making robot division in 2009, but it makes good profit now.
Selling grids would let the company redeploy capital towards less volatile automation. But ABB already has a strong balance sheet for acquisitions. Net debt is a manageable $1.2 billion and there's $4.6 billion cash. A $1 billion cost-cutting plan and a program to find $2 billion in working capital savings by the end of 2017 will add firepower.
Electrical engineering valuations have narrowed, but ABB still trades at about 15 times forward earnings, well ahead of Siemens. Better margins and strong cash generation justify some of that, while the company is midway through a $4 billion share buyback.
That won't be enough to placate investors forever, though, especially those who spy more value in spin-offs. GE has shown what's possible with its $10 billion purchase of Alstom's energy business. That deal turns up the competitive heat in Europe. If Spiesshofer can't find a similarly bold solution to ABB's growth impasse, the break-up clamor will get louder.
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