Morningstar | ABB 3Q: Mixed Results, Shares Fairly Valued
We will be tweaking our forecasts downwards on ABB following a mixed third quarter but do not expect our changes to materially affect our USD 25.40 and CHF 25 fair value estimates. We retain our wide moat rating. Our forecasts for the full year were on the high end of consensus coming into the quarter, and our forecast changes will partly stem from a lower foreign exchange benefit, but more importantly from weaker underlying growth in the company's ailing power grids segment. While the latter benefits from a growing renewables end market and grid automation software, it still has decent exposure to traditional power markets, where markets are more challenging. Half of ABB's revenue comes from industrial automation, and the company's robotics division (roughly 25% of group revenue) continues to outgrow all other segments. Group results came in with 3% organic growth but robust 9% order growth, while EBITA of 12.1% was down 80 basis points year over year due to the GEIS acquisition.In the third quarter and first nine months of the year, the company's power grids division is flat and down 4%, respectively, on an organic basis. We had forecast a more modest decline of 2%. However, 11% organic order growth in the quarter points to a revenue recovery in the coming quarters; thus, while we will be lowering our forecasts, we do not expect severe cuts. In the second quarter, the company cited weak long-distance transmission equipment orders as the culprit for declining revenue. Grid automation in the third quarter looks to be one of the main drivers behind the rebound in orders.
The electrification products division reported a sharp decline in EBITA from digesting GE's industrial solutions business, which was a fixer-upper with subpar 8% EBITDA margins and a stale product portfolio from underinvestment in GE's hands. The 260-basis-point decline to 13.5% (down sequentially from 16% in the second quarter) was not unexpected, but we expect improvement to take some time.
ABB specializes in power and automation technologies. Co. provides a broad range of products, systems, solutions and services that are designed to boost industrial productivity, increase power grid reliability, and enhance energy efficiency. Co.'s automation businesses serve a full range of industries with process optimization, control, measurement and protection applications. Co.'s power businesses focus on power transmission, distribution and power-plant automation, and support electric, gas and water utilities, as well as industrial and commercial customers.
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