We recently initiated our coverage on ABB Ltd. (ABB - Analyst Report), a leading power and automation technology supplier for diverse utility and industrial customers, across the globe. The company has a strong foothold in major industries like rail and wind energy. It is also focused on optimizing its business portfolio by expanding its worldwide distribution network and streamlining its business by divesting underperforming businesses.
The company had reported weak fourth-quarter 2014 earnings owing to sluggishness in its power systems (PS) business. However, despite the continuation of global economic headwinds, the company is receiving large orders in key sectors.
This power and automation bellwether also benefited from the execution of its strong backlog and improved demand from earlier-cycle projects in the quarter. Also, ABB’s ongoing initiatives in improving its cash flow generation, cost containment and stabilization of its PS business are likely to push the company forward in the future.
However, ABB’s business is prone to be impacted by currency fluctuations and adverse global political and economic conditions since a significant portion of ABB’s revenues is derived from non-U.S. markets. Moreover, macroeconomic conditions impact the level of capital invested in the business. A significant portion of ABB’s revenues is generated by power-related end markets, which are dependent on capital investment and the credit situation of the market.
The company also bears the risk of cost overruns as a significant portion of its contracts are fixed-price in nature. Also, some projects like turnkey products are usually long-cycle projects that could be delayed or cancelled. As such, the company may face losses or a drop in profit level under these contracts, if costs increase above its estimates.
ABB also has several patents and intellectual property rights for its existing and forthcoming products. However, it may lose its competitive edge if the patents expire or are not recognized in a country. Moreover, the company operates in highly competitive markets that have been subject to increasing consolidation. Given the range of products and services that ABB offers and the diverse markets it serves, the company has many competitors.
Further, the company’s business could be adversely impacted by regional, national and/or global environmental norms and regulations to significantly limit or reduce greenhouse gas emissions in the future.
ABB currently holds a Zacks Rank #4 (Sell). However, other stocks which are worth considering at the moment are AVT, Inc. (AVTC), Plug Power Inc. (PLUG - Snapshot Report) and AO Smith Corp. (AOS - Snapshot Report). All three carry a Zacks Rank #2 (Buy).
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