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ABB Battles Inflation Woes With Restructuring Initiatives

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ABB Ltd.’s (ABB - Free Report) updated research report was issued on Dec 17. Solid end-market sales, acquisitions and the Power Grids business divestiture move will likely benefit this Zacks Rank #3 (Hold) stock. However, rising cost remains a major cause of concern.

Inside Story

ABB is poised to strengthen its competency on the back of the company’s unique Next Level Strategy (implemented in 2014). In line with this program, the company is currently focused on three areas — relentless execution, profitable growth, and business-led collaboration.

The company believes increased popularity of ABB Ability (digital offering), solid demand secured from industrial, utility and transport & infrastructure end-markets, and strategic corporate collaboration deals with renowned companies like SNC-Lavalin (September 2018) will drive its revenues in the quarters ahead. Moreover, the Intrion acquisition (September 2018) and the GE Industrial Solutions (GEIS) buyout (June 2018), as well as new investments made in marine vessel solutions will likely support the upside.

Additionally, ABB anticipates securing new orders for its premium cruise ship, rail, data center and high-voltage direct current solutions. The company's robust order momentum will likely continue to bolster its revenues in the near term. Per our estimates, the company’s year-over-year revenue growth is pegged at 7.1% and 6.2% for 2018 and 2019, respectively. On the other hand, year-over-year earnings growth predictions are currently pegged at 11.2% and 5.7% for 2018 and 2019, respectively.

ABB recently (Dec 17, 2018) announced its plan to divest 80.1% of its Power Grids business to Hitachi, Ltd. (HTHIY - Free Report) for $11 billion. By divesting the majority stake of Power Grids business, ABB intends to put greater focus on its core businesses like automation technologies. Also, the company plans to restructure its existing businesses, going forward.

ABB perceives that the deal will bring in cost synergies of $500 million on an annualized basis. Also, it intends to return net cash proceeds of $7.6-7.8 billion from the divestiture deal to shareholders. The divestment is anticipated to be closed by first-half 2019.

Despite the positives, we note that over the past month, ABB’s shares have lost 3.9%, as against the 6.7% loss recorded by the industry it belongs to. 

Rising cost of sales has been a major concern for ABB for the past several quarters. The metric flared up 7% in the first nine months of 2018. The company noted that tariffs levied on U.S. imports are escalating the prices of its key inputs like steel, copper and aluminium. Inflationary pressure might continue to escalate ABB's aggregate cost and hence, weigh over its profitability in the quarters ahead. Also, the GEIS integration cost, efforts undertaken to wind up the non-core train retrofit business might dilute earnings in the upcoming quarter. Moreover, ABB’s new restructuring initiatives will result in annual cost of roughly $500 million. This might hurt its margins in the near-term quarters.

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Better-ranked stocks in the same space are listed below:

Enersys (ENS - Free Report) carries a Zacks Rank #2 (Buy). The company pulled off a positive average earnings surprise of 2.83% in the past four quarters. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Rexnord Corporation (RXN - Free Report) also holds a Zacks Rank of 2. The company delivered positive average earnings surprise of 17.71% in the trailing four quarters.

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