EUR 850.00 For Business Accounts Only

Morningstar | ABB CEO's Sudden Departure Result of Lagging Industry 4.0 Strategy; 1Q Results in Line

Wide-moat ABB released preliminary first-quarter results in line with expectations and announced the departure of CEO Ulrich Spiesshofer. A change in guard could be positive for the company, provided the new CEO has greater vision on Industry 4.0 applications. Some activist investors are also pushing for a divestment of the electrification division. While the buildings part of this division is tangential to the core automation portfolio, we see overlap in other customer segments, such as process industries, that could prove useful in cross-selling the automation portfolio. While ABB lags on software, it has a base of robotics and automation customers that put it in a solid position for Industry 4.0. We are maintaining our CHF 25 and $25.40 fair value estimates and think the shares look attractive.

The CEO decision was clearly sudden, given that the board had not started a CEO search. Chairman Peter Vosen will serve as interim CEO. We read the decision as the board's (as well as activist investors') frustration with Spiesshofer's strategy to develop Industry 4.0 offerings.

Siemens and Schneider are well ahead of ABB in building software expertise through multiple acquisitions over the past decade. ABB has been late to the party and in some cases has had to turn to second-best choices. With the acquisition of programmable logic controller supplier B&R in 2017, ABB was hoping to gain share in hybrid automation solutions, which combine distributed control systems and PLCs. However, controllers have high switching costs for customers, making it tough for a company like B&R to expand market share, even with the weight of ABB behind it.

While the recently announced Dassault partnership enables ABB to offer design digital twin software, an acquisition would have been more beneficial, as it would have given ABB the opportunity to develop software in house, important if ABB wants to leverage its engineering expertise in differentiating its software offerings.