ABB - Q1 thoughts, insights and challenges

I wrote about ABB - the Swiss-Swedish engineering/infrastructure company - a couple of months ago and bought some stock for my pension fund below CHF22.  Back then I concluded that:

'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)'.

So how about that potential today post the publication of the Q1 numbers - and especially following broad peers like GE, Siemens and Alstom being involved in potential merger/bid talks in recent days?

Well, ABB's Q1 numbers did not appear that striking at first glance with slightly positive orders, mildly negative revenues...and disappointing operational profitability leading to a double digit decline in operational ebitda:

As noted above, orders were probably the best aspect of the numbers although I note each region had material country-by-country order differentials:

 So what was the operational ebitda margin issue?  This chart nicely summarises the challenges the company is facing: some negative volumes and the wonderful catch-all of 'other' but the real issue was project margins in the Power Systems (PS) business. 

So what is the plan here?  Well the plan is really the on-going plan as investors have known for a while that this area was underperforming.  The fact that now the 'transformation will take longer than originally expected, and will continue to weigh on margins' is not good news.

Thoughts?  More company-specific than general macro although the relative dullness of the core numbers ex PS division issues is saying something about the still tricky global backdrop.  Watch for an opportunity to build at sub CHF22 and potentially CHF20?  For a strong theme company this is a good idea.  Strong balance sheet / dividend yield, strong themes...but having slightly lost its way is a good combination...especially as some of its peers may be involved in navel gazing M&A currently.