Monday, July 7, 2014

Analysis of ABB

ABB, a Swiss automation company

Company: ABB

ISIN CH0012221716 | WKN 919730      

Business: A Swiss power and automation company. They are divided into five segments: Power Products (circuits, switches, capacitors and power distribution), Power Systems (solutions for power generation plants, transmission grids and distribution networks), Discrete Automation & Motion (motors, generators, robotics and DC chargers), Low Voltage Products (low-voltage circuit breakers, switches and control products) and finally Process Automation (solutions for control systems, measurement products and life cycle services).

Active: They are currently active in 100 countries world wide.

P/E: 19.0

This company was analysed due to a request from Chris Bailey posted on the Summary of April 2014 article.

contrarian values of P/E, P/B, ROE as well as dividend for ABB

The P/E for ABB is too high for me with 19.0 and the P/B is also too high with 2.8 which gives a no go from Grahams formula. The earnings to sales are ok with 7% and the ROE pretty nice with alsmot 15%. The book to debt could have been better but is still at an ok ratio of 0.7. In the last five years they have had a yearly growth rate of 5.7% which is excellent and this gives us a motivated P/E of 16 to 20 which means that ABB is today fairly valued on the market. The spend a big lump of money on research which correspond to 53% of their earnings so they are at least trying to stay ahead of competitors. They pay a fully acceptable dividend of 3.1% which correspond to 58% of their earnings which is still doable but it would be good if they could keep pushing up their earnings.

Conclusion: Graham says no and I am uncertain. The P/E and P/B is really too high for me but the growth has been excellent and the ROE is also very nice. I am certain that they will continue to sell their products and services for many more years. So the question here is if one are able to buy a great company at a fair price... I leave it up to you to decide.

I previously wrote a reflection called "The next revolution" and I think that ABB will be one of the companies benefiting in the future.

If this analysis is outdated then you can request a new one.


Anonymous said...

Compare to your analysis of Siemens. Very similar data!

ABB has a better growth rate, but both company are valued almost the same, and pay the same dividend.

My choice from the two is ABB, what would be yours?

Fredrik von Oberhausen said...

Nice comparison! Here is the link to the analysis of Siemens 2014 to make it easier to find.

First off both are overvalued in my eyes due to the well above P/E 10 values but like you say ABB looks better.

Besides from what you mention that the yearly growth rate has been much better for ABB I would add to that that ABB has the benefit of almost half the revenue to Siemens. It is usually easier to increase revenue and yearly growth when you as a company are smaller and ABB is almost half the size of Siemens.

Due to the growth of ABB this then also gives us a situation that ABB is fairly valued today while Siemens is very clearly overvalued.

The second thing though is the debt and there Siemens have 2.5 times more than ABB which means they have increased their ROE via debt leverage. So the ROE of ABB is much better than Siemens accounting for this matter.

So... just like you say... ABB looks better than Siemens but I would not buy either of them today.

Anonymous said...

Ths stock prices of ABB and Siemens are also following each other closely, even more tight than they are compared to index (OMX or DAX).

However the ABB stock had a dip after Q1 2014 report.

Fredrik von Oberhausen said...

It sounds as if you are closely observing the two of them!

This is good news for me because then I hope that you will get back to me when the price of either of them starts to be more reasonable that what they are today.

Or are you think about buying ABB already now?

Anonymous said...

Generally, I think ABB is an excellent long term investment, but it is all about the entry price.

However, a couple of month ago I did a comparison between ABB and Siemens (and index) and observed the dip of ABB. I took a small short term position in ABB, hoping that it would "shape up" before the Q2 report.

The biggest "jump" in the stock price (in SEK) until now, was related to the lowered interest rate of the Riksbank, and not to any specific ABB-news or analyst recommendation. I still thinke there is a little more to come, but as you say it is not a cheap stock at the moment.

I do not like short term positions over report dates, so I plan is to sell before the 23:rd of July.

ingenjorsliv said...

Great company and a little bit too expensive. I'm also sure it's a Swedish company :)

Fredrik von Oberhausen said...

Back in 1988 the Swedish ASEA merged with the Swiss Brown, Boveri & Cie to form ABB with headquarter in Zürich, Switzerland.

Emotionally I guess we Swedish people like to think of it as Swedish and maybe it still is but for the analysis I will always put the reported headquarter as the country.

ingenjorsliv said...

Damn, you are right!
Stupid patriotic feelings... But at least we Swedish ppl can own the share and gain dividend without paying Swiss tax. Link: