Morningstar | ABB Looks On Track to Meet Our FY Expectations, With a Couple of Caveats
Our key takeaways from ABB's first-half 2018 results are as follows: 1) The company looks on track to meet our forecasts, including acquisitions, but meeting our underlying organic growth assumptions depends on remaining 2018 deliveries in the division order books; 2) organic revenue for the power grids division is tracking below our full-year expectations but could still meet our forecasts, given the higher order growth relative to revenue; 3) similarly, for industrial automation, order book growth looked more promising than revenue growth. We maintain our wide moat rating and our CHF 25.80 and $25.40 fair value estimates for the local shares and ADR, respectively, and we believe the shares are trading at attractive levels.We have been awaiting a turnaround in the power grids division from both a reversal of organic revenue decline and margin improvement to the company's target margin corridor of 10%-14% for the division. Assuming that some of the current order book converts into second-half revenue, we believe the division can meet our full-year forecast for a 2% revenue decline and a return to organic growth next year. These look achievable this year, given the 8% organic order book growth relative the 6% decline in revenue.
The division's first-half 9.8% EBITA margin is tracking just shy of the bottom end of management's 10%-14% medium-term targets. With volume likely picking up in the second half from order book conversions, we think the company will easily meet the bottom end.
Process industries seem to be driving ABB's recovering industrial automation organic order book growth of 9.5% in the first half, after only 2% in 2017. Here, the company's key end markets include energy and midstream in particular, where we believe upgrades and automation of existing plants helped the order book. Other capital goods companies with midstream exposure, such as Alfa Laval, have also reported an uptick in spending from those customers.
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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