A Strong Play on Global Infrastructure
07/30/2007 12:00 am EST
Nicholas Vardy, editor of the Global Stock Investor, finds a Swiss engineering giant that is profiting handsomely from the boom in building new infrastructure throughout the world.
Based in Switzerland, ABB (NYSE: ABB) is one of the world’s largest providers of power and automation technologies to utility and industry customers. It is profiting handsomely from the buildout of the new infrastructure in fast-growth global economies.
On the other hand, the developed economies of both the United States and Western Europe need massive upgrades to their aging electrical infrastructure during the next few years. Combine these two themes and you get a megatrend that virtually guarantees that investors in ABB will rake in big profits for many years to come.
ABB was the darling of the European business scene in the 1900s. The company was touted regularly as “Europe’s answer to GE.” But CEO Percy Barnevik and his handpicked successor, Goran Lindahl, almost took ABB into bankruptcy. Investors saw ABB’s market capitalization drop by about 70% from its peak in 2000.
After this ignominious fall, ABB’s new management restructured the company’s product portfolio and transformed it into a leaner, meaner, and more focused company. Today ABB has just two divisions: power technology and automation. The revenue from “mature markets” accounts for 56% of its business, with the remaining 44% stemming from emerging markets.
Not surprisingly, China and India are particularly crucial to ABB’s future prospects. ABB already has won some critical contracts, such as a transformer upgrade in Beijing for the 2008 Olympics. And ABB also installed all the robotics systems for a recently opened Daimler-Chrysler manufacturing plant in Beijing.
India’s aspirations in infrastructure spending match those of China. The Indian government plans to spend $200 billion in power generation, transmission, and distribution between 2007 and 2012. And this is all reflected in the massive growth rate of ABB’s business in these regions, with revenues growing at a whopping annual rate of 35% in China and 34% in India.
Meanwhile, ABB is benefiting from strong replacement demands in mature markets, as well. The US has the largest power grid in the world and every little component from coast to coast will likely need to be replaced. Europe also needs a massive upgrade of existing equipment, as national power grids become more interlinked in the European Union.
Recent financial results have confirmed ABB’s breathtaking comeback. ABB’s first quarter far exceeded analysts’ expectations. Net profits jumped by an eye-popping 163% to $537 million, while operating profits before interest and taxes rose 67% to $822 million. Operating profit margin rose to 13.2% from 9.6% in the same period last year. The first quarter of 2007 was the 16th consecutive quarter of year-on-year EBIT margin improvement. (Last week, the company reported that second-quarter earnings had nearly doubled over the same quarter a year ago, beating expectations—Editor.)
Let’s buy ABB at market and set our stop at $20.75. (The ADSs closed at $22.72 Friday.) It is my number-one long-term pick on the global infrastructure boom.