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Is ABB’s Future Still Sparkling After Its Second Quarter Earnings?

August 04, 2014 | About:

The Swiss power conglomerate, ABB (NYSE:ABB) reported its second quarter earnings on July 23, with a mixed set of numbers revealed by the management. The company’s earnings dropped for the third consecutive quarter with net income missing analyst estimate of $701 million standing at $636 million at the end of the quarter.

Are there any positive takeaways from the period? Let’s dig deep to get a clearer view of the quarter developments.

Quick Recap

Revenue fell 1% to $10.2 billion on an organic basis with Power Products down by 3% and Power Systems down by 7%. Thankfully, the automation and low voltage operation segments performed better with 3% increase seen in Discrete Automation segment, 3% growth in Low Voltage and “only” 2% decline noticed in Process Automation division.

Source: ABB

The profits plummeted for ABB with EBITDA declining 15% this quarter, below analyst expectations of 10%. The operating income also missed analyst predictions by 12%, declining 20% as margins were missed by around two and a half points. But fortunately, due to the cost saving measures, cash from operations improved by 60% to $888 million from $543 million reported in the year-ago period. The improvement in the net working capital and inventory management helped in increasing the cash flow from the divisions by $280 million.

Basic earnings per share were down to $0.28 per share compared with $0.33 in the same quarter last year.

Order Intake Remains Impressive

Orders were up by 13% to $10.6 billion during the quarter -- maximum orders were reported in the discrete automation and process automation sectors that grew by 7% and 16%, respectively. Low Voltage was the only business that did not see any organic order growth.

The order growth rate peaked in North America rising 31% from last year, primarily driven massive orders, particularly the $400 million deal to provide power transmission link in Canada. Asia was another bright spot, showing double digit growth of 13% over last year. But China led the race with 14% order improvement, followed by Indonesia and South Korea. However, weakness in the power sector resulted in an orders decline of 9% in India.

Source: ABB

High order intake this quarter led to the book-to-bill ratio re-entering the positive territory at 1.04x. The strong oil and gas demand along with growth in general industry demand compensated for the weakness seen in mining. ABB saw a 70% rebound in large orders.

China Holds Great Opportunity

ABB has already expanded its base in over 500 Tier 2 and Tier 3 cities in China along with its partners. It also holds an individual presence in over 100 cities in China and is looking forward to enhance its base in another 100 Chinese cities within the next three years.

ABB has over 500 standard service products, from spare parts to energy efficiency, in the Chinese market. It has over 200 service locations and is hoping for further expansion. It has just set up its railway systems R&D center in Guangzhou this month to bring itself closer to the local market demands and to help ABB to respond quicker to customer needs for innovative railway traction systems.

ABB is also slated to roll out the world’s largest EV network in China this year. At the ABB Power Protection channel partner meeting held in mid-June, ABB discussed about the launch of PCS100 multi voltage UPS first in China, and then around the globe.

Positive Outlook

The long term demand outlook of ABB’s businesses remains clearly positive. The need for reliable electricity transmission and distribution would increase with time driven by factors such as rapid urbanization, actions to address global warming, increased power needs from digitization, and the refurbishment of old power grids.

ABB is well positioned to tap opportunities for generating stable long term growth with its strong market presence, broad geographic scope, technological leadership, and financial strength.

Though the macro-outlook has not been altered by ABB’s management, uncertainties regarding recovery in key markets like Europe over the coming quarters should be on the watch list. However, organic growth is the management’s top priority. ABB’s CEO, Ulrich Spiesshofer, said -- “We will drive our relentless execution on cash and further step up the momentum on cost savings. We are confident that our balanced growth and execution initiatives will yield positive results for our shareholders.”

Concluding Word

Even when its revenues come under pressure, ABB emphasizes on cost savings and productivity improvements to keep its cash flow intact to maintain returns to its stockholders. The continuum in order intake and rapid growth in China augurs well for the company. So, let’s stay tuned and check out whether this trend persists in the near future.

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