Thursday, 13 February 2014

ABB - getting close to an interesting level

Just under a month ago I wrote a posting on the Swiss-Swedish engineering company ABB which discussed a corporate update which disclosed that bad weather issues had impacted their Q4 trading. 

Looking through the FY13 numbers, this was a shame as the company is generally making progress in its cashflow, ebitda and dividend metrics via their increasingly global orientation, pan-cycle exposure and on-going cost cutting. 

It is also good to see that the company continues to have success in smaller 'base orders'.  'Large orders' are, by definition, much lumpier (as shown in the company's relatively poor power sector orders versus their automation orders, for example).  I do note here that they will soon be lapping far easier comparisons. 
They are not firing on all cylinders though as shown below and have pulled back their revenue margin hopes (perhaps inevitable after January's statement).  Flat margins on a rising revenue trend is not a disaster but - as shown by the company's own 2015 targets of a 13-19% ebitda margin 'corridor' - there is a lot more scope here. 

Back in January I wrote that:

'Using the Swiss quote...CHF20 is still a clear buy level but I am looking to kick off a starter position at CHF22 which has been both a resistance and support point over the last year (as shown above)'.

Plugging the FY13A numbers in, the share is currently trading at x14 EV/ebit (with a 4.5% free cash flow yield of which 3% is paid out as a dividend) which is not particularly cheap but does not take account of the above potential (especially as the company is almost ungeared too).  At CHF22 (the shares is a handful of per cent above this level at the time of writing) I will buy an initial starter position.  The equivalent in the US is just under US$25. 
 

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