ABB Rise as Quarterly Profitability Gains on Cost Cuts

ABB Ltd., the world’s largest maker of power transformers, rose as much as 3.7 percent in Zurich trading as Chief Executive Officer Joe Hogan’s drive to trim costs helped to boost profitability in the first quarter.

The margin based on earnings before interest, taxes, amortization and depreciation rose by 1.1 percentage points to 15 percent, the Zurich-based company said today. Sales increased by 9 percent to $9.7 billion.

While Hogan reins in travel and entertainment expenses, he’s also betting on growth in the U.S. and Asia as clients in Europe reduce spending, and on Monday he announced a $1 billion deal to buy Power-One, a California-based maker of solar inverters. Sourcing initiatives and operational improvements saved $260 million in the quarter, compensating for less profitable orders.

“Order intake may disappoint, but costs are under control,” said Christoph Ladner, an analyst at Kepler Capital Markets in Zurich with a “hold” rating on the stock.

The stock rose as high as 21.25 francs and was up 2.5 percent at 21.02 francs as of 11:31 a.m., valuing the company at 49 billion francs ($52 billion). Before today, ABB had gained

9.3 percent this year, beating the 5.1 percent decline of Munich-based rival Siemens. U.S. competitor General Electric gained 2.4 percent in New York.

‘Flat Year’

First-quarter net income fell 3 percent to $664 million, missing the average estimate by analysts of $713 million in a survey by Bloomberg.

“What we are prepared for is a very flat 2013 compared to 2012,” Hogan said in a video posted on the company’s Website. “We are ready for a better second half of 2013, but we certainly aren’t spending in anticipation of that.”

Hogan said growth in the U.S. decelerated further in the quarter and industrial investments in much of Europe remained mixed. ABB’s order backlog declined 1 percent from a year earlier as organic orders in the Americas region dropped 14 percent, mainly because of less demand from the power, oil and gas industries. Orders from Chinese clients rose 20 percent.

Last year, U.S. orders grew 30 percent, contrasting with a drop in Germany. Over the last five years, the company more than doubled its U.S workforce to 20,000.

“Clearly the top line is slow,” Sanford C Bernstein analyst Martin Prozesky said by phone, adding that it doesn’t concern him because of the improvement in profitability. The margin rose across four out of five ABB units from a year earlier and the company’s power divisions are more profitable than those of Germany’s Siemens, he said.

R&D Investments

Hogan has pledged to keep a closer eye on costs after exceeding a targeted savings plan last year amid uncertainty about growth in the developed world and the timing of a rebound in Chinese manufacturing.

“We made some significant investments in research and development and sales over the last 18 months to two years,” Hogan said on a conference call today. “We don’t want to add to them unless we see stronger economic activity,” he said, adding that he’s also monitoring expenses such as travel and entertainment more closely.

The Swiss company said industrial production growth and government policies will remain the key drivers of demand for the rest of 2013 and it doesn’t see clear trend changes going into the second quarter. It also said it remains committed to delivering more cash to shareholders.

Solar Power

This week’s Power-One deal will give ABB, the world’s biggest electricity-networks builder, inverters that allow solar power to be fed into grids. ABB is looking to tap a market forecast to grow by more than 10 percent annually, driven by a need for affordable energy and declining costs of producing solar power.

ABB is aiming to close the deal in the third quarter, Hogan said today, adding that the spot price of Power One shares shows there’s not much speculation about “other opportunities” for the maker of solar inverters.

Hogan said there is some risk in buying Power-One amid a “tumultous market” for renewable energies like solar and wind power. He predicts the bet to pay off as the cost of producing solar energy is moving towards the price of purchasing power from the grid.

Technology Deals

Power-One is the latest bite-sized acquisition by Hogan as he looks to bring new technology to the Swiss company’s portfolio. Solar inverters convert the direct current generated by solar panels into the alternative current needed to run appliances on power grids.

The deal will add to more than $10 billion of U.S. investments over the past years including the purchases of drives manufacturer Baldor Electric Co. and low-voltage products maker Thomas & Betts Corp.

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