Acquisitions In China And Spin-Offs Will Extend Global Reach

Key Takeaways

• Strategic acquisitions and spinoffs aim to expand market reach and improve net margins through focused operations and independent evaluations.
  
• Growth in Electrification orders and local production projects are expected to boost revenue and enhance operational efficiency by meeting regional demand.
  
• Economic uncertainties and competitive pressures could limit ABB's revenue and growth, with risks in order execution, market penetration, and operational margins.

Catalysts

Provides electrification, motion, and automation solutions and products for customers in utilities, industry and transport, and infrastructure in Switzerland, rest of Europe, the Americas, the United States, rest of Asia, the Middle East, Africa, China, and internationally.

• The acquisition of Siemens Wiring Accessory in China by ABB's Smart Building unit is expected to expand market reach across 230 cities, add $150 million in sales, and be margin accretive, positively impacting revenue and net margins.
  
• The planned spin-off of ABB's Robotics division as a separate entity is anticipated to enhance value creation for both companies by allowing Robotics to be evaluated independently, potentially improving earnings through focused capital allocation.
  
• The strong growth in Electrification orders and anticipated low double-digit growth in Q2 are driven by a robust order backlog and continued demand in the commercial and utility segments, likely boosting revenue and margins.
  
• Expansion projects in the U.S., such as the investment in low-voltage facilities, are driven by increased demand and aim to improve local production capacity, contributing to future revenue growth and operational efficiency.
  
• ABB's strategic focus on sustainability and local-for-local production across major regions such as the U.S., Europe, and China is poised to enhance long-term profitability, possibly leading to improved net margins by capitalizing on regional demand and reducing tariff exposure.

ABB Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ABB's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.6% today to 13.5% in 3 years time.
• Analysts expect earnings to reach $5.2 billion (and earnings per share of $2.89) by about May 2028, up from $4.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.7x on those 2028 earnings, down from 23.2x today. This future PE is greater than the current PE for the US Electrical industry at 18.4x.
• Analysts expect the number of shares outstanding to decline by 0.99% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.42%, as per the Simply Wall St company report.

ABB Future Earnings Per Share Growth

Risks

• The exclusion of any significant impact on performance from tariffs due to expected exemptions and pricing actions might not completely safeguard against supply chain disruptions, potentially impacting revenue and profitability if global economic uncertainties worsen.
  
• The mention of lower-than-planned backlog conversion in Q1 and delays in large order bookings could signal potential risks in meeting revenue targets if order execution faces continued slowdowns.
  
• The competitive environment facing ABB's Robotics division could limit growth if competitors advance in technology or penetrate new markets more effectively, impacting future earnings and margins.
  
• ABB’s forecast for stable operational EBITA margins, despite one-timer contributions in Q1, might involve downside risk if ongoing economic uncertainties or cost pressures affect operational improvements more significantly than anticipated.
  
• The broader economic uncertainty could affect customer orders and investment decisions across ABB's key market segments, impacting order intake and leading to potential revenue shortfalls.

Valuation

• The analysts have a consensus price target of CHF46.758 for ABB based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CHF56.94, and the most bearish reporting a price target of just CHF34.18.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $38.5 billion, earnings will come to $5.2 billion, and it would be trading on a PE ratio of 22.7x, assuming you use a discount rate of 5.4%.
• Given the current share price of CHF43.19, the analyst price target of CHF46.76 is 7.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.