Infrastructure Giant Keeps on Building

03/08/2010 1:00 pm EST


John Christy

Founding Editor, Forbes International Investment Report

John H. Christy III, editor of Forbes International Investment Report, says the share price of Switzerland's ABB is lagging despite recent—and future—strength.

When your business involves selling large, complex, and extremely expensive capital goods like power and automation systems, a recession is usually bad news. Fears about an impending Great Depression, however, can be devastating.

In large part, that explains why shares of the Swiss infrastructure equipment conglomerate ABB (NYSE: ABB) collapsed nearly 70% from May to November 2008. As capital spending evaporated globally, investors feared that ABB’s business would also grind to a halt. And for a while, that’s more or less what happened.

While the global economy is hardly out of the woods yet, ABB showed some impressive signs of life in its fourth-quarter and full-year 2009 report [in February]. Although orders were down a painful 24% in the Americas and 10% in Europe, results in Asia and the Middle East/Africa regions were strong, up 4% and 43%. Overall, ABB’s revenue fell 4% to $8.8 billion in the fourth quarter, but net income doubled to $540 million as a result of its cost-cutting efforts.

ABB’s fourth-quarter 2008 revenue figure was its best revenue quarter ever. So despite less-than-spectacular performance in many parts of the world, ABB has remained within striking distance of record results throughout the global economic downturn.

Much of the credit goes to ABB’s management, which has done a superb job navigating through difficult conditions. Operating margins remained in the mid-teens, and full-year 2009 free cash flow was $3 billion. Return on capital employed was a robust 27%, and the company ended the year with $7 billion of net cash on its balance sheet. ABB’s backlog was $25 billion heading into 2010. Those are not Great Depression numbers.

These results, while encouraging, mask one of the more exciting stories about ABB: emerging markets. More than half (51%) of ABB’s new orders in the fourth quarter were from countries in the developing world, and that proportion is expected to keep rising. These countries have massive electrical infrastructure needs and these projects can’t be put off forever. Even in an otherwise sluggish fourth quarter, ABB posted phenomenal order growth in some markets like India (72%) and Russia (81%).

At [recent prices], ABB has doubled since the dark days of the fall of 2008, but it is still a good 40% off its May 2008 highs. With analysts expecting $1.49 of earnings in 2011, ABB sells for a reasonable multiple of 14x. If the economy recovers, ABB management forecasts call for 15% to 20% earnings growth for 2011 and greater than 30% return on capital employed. (ABB closed Friday just above $21—Editor.)

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