ABB: After Asbestos

01/27/2006 12:00 am EST


Alexander Green

Chief Investment Strategist, The Oxford Club

With "green" implying monetary success, Alexander Green is aptly named. He has a highly successful record of isolat ing long-term opportunities that are under-recognized by Wall Street. Here, he picks an international firm recovering from asbestos-related troubles.

"Many of our favorite stocks are at the top end of their range. But we view this as a confirmation that the business prospects for these companies are still improving. Which brings me to ABB, Ltd. (ABB NYSE), my top pick for 2006. Based in Switzerland, ABB is the one of the world’s largest electrical engineering companies. In particular, it is a leading supplier of power networks.

"The company is #1 or #2 in virtually every business line in which it competes. And the demand for power equipmentespecially in emerging markets like China and India is growing at a rapid pace. In the US, the average age of power equipment is 40 years. That means we’re about to enter a major replacement cycle. And the demand for power equipment in emerging markets like China and India is growing at a white-hot pace, as well.

"However, we moved ABB to a hold in July as the price fell back on news that a US appeals court rejected the company’s $1.2 billion settlement plan for asbestos litigants. I promised to move it back to our buy list when the earnings prospects and the price action improved. And they have. In the third quarter, revenue climbed 13%, orders rose 15%, and earnings before interest and taxes climbed 81%. Now, the company appears close to a final resolution of lawsuits concerning its asbestos-insulated boilers, as well.

"The stock is up over 50% for us in the past year and a half, while the S&P 500 is up 9% over the same period. And now it’s back on our buy list. We’d also note that the stock is Swiss-franc denominated, providing a valuable dollar hedge. Overall, the company operates in a profitable niche with high barriers to entry. It has good earnings momentum and limited competition. Standard & Poor’s says it may soon raise the company’s rating to investment grade. Oh, and one other thing…it just recently hit a 52-week high."

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