Is ABB Stock a Buy for 2019?
Why ABB is selling power gridsABB runs four broad businesses. In order of their contribution to the company’s total revenues in 2017, they are electrification products, power grids, robotics and motion, and industrial automation. Through these segments, the company primarily serves the utilities, industrial, transportation, and infrastructure sectors. Power grids has been the slowest to grow: It contributed nearly 28% to ABB’s total revenues in 2017 but earned an EBITA (earnings before interest, tax, and amortization) margin of only around 10% in 2016 and 2017 each compared with the 13% to 15.6% range for the other segments. ABB’s failure to catch up with Emerson Electric’s and Honeywell International’s margins, as both companies have greater leverage to the more profitable automation and robotics businesses, even compelled hedge funds like Cevian Capital to call upon ABB to separate power grids. With ABB now formally selling power grids, hedge funds must be a happier lot. But should investors be?
ABB’s growth plans after power grids saleABB expects to sell its power grids business by the first half of 2020, retaining a 19.9% stake with a defined exit option three years after the closure of the acquisition. ABB’s CEO Ulrich Spiesshofer believes this move will “create a new ABB, a leader focused in digital industries” by way of its four new businesses: electrification products, industrial automation, robotics and discrete automation, and motion. While we’ll find out more about ABB’s new growth strategy later in February along with its fourth-quarter earnings release, we do know that it expects to incur restructuring charges of nearly $500 million but save just as much as it simplifies its organization structure effective April 2019. ABB’s medium-term financial goals include:
- 3% to 6% annual growth in comparable revenue (local currency revenue, adjusted for acquisitions and divestitures)
- 13% to 16% EBITA margin
- Earnings per share growth exceeding revenue growth
- 100% conversion of net income into free cash flow
- Rising, sustainable dividends.