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Published: September 29, 2008
If you haven't heard of ABB Ltd.
(NYSE: ABB, $20.16),
don't feel bad -- you're not alone. Yet, while the Swiss company
isn't particularly well known among U.S. investors, its
reputation as an infrastructure heavyweight is well established
in other parts of the world.
The inescapable fact is that power grids throughout the U.S. and
Europe are in desperate need of upgrades and repairs. Many of
these systems were constructed in the 1950s and have received
only the bare minimum in maintenance over the past few decades,
despite steady increases in annual electric consumption.
According to Morningstar, the U.S. has spent over $200 billion
on power plants and generating equipment over the past 10 years,
but only $40 billion on transmission lines that carry power to
homes and businesses. And the American Society of Civil
Engineers has downgraded the nation's energy grid to a "D,"
citing dwindling maintenance expenditures and the higher threat
of bottlenecks and potential blackouts.
According to the Energy Information Administration, the United
States currently uses about 100 quadrillion (100, followed by 15
zeroes) BTUs of power annually, and that total is expected rise
+34% within the next 25 years. Worldwide, power consumption is
expected to grow nearly twice as fast. Clearly, a large sum of
money will have to be spent if that much power is to safely and
reliably get into the hands of those who need it.
That's where ABB comes in. The firm is a global powerhouse in
the fields of power and automation, supplying products that help
utilities and other industrial customers cut costs and operate
as efficiently as possible. The company's diversified product
portfolio includes things like assembly line robots -- but its
most promising divisions work with transformers, circuit
breakers, switchgear modules, capacitors, substations and other
devices to support the generation, transmission and distribution
of power.
ABB is a world leader in power infrastructure, working with
customers in over 100 countries around the globe. Within just
the past few months, the firm has won contracts worth $28
million in Turkey, $31 million in Switzerland, $45 million in
Angola, and $113 million in India -- not to mention being
awarded a $233 million deal to supply the power system for a new
power plant in Qatar.
The company is coming off an impressive quarter that saw
operating cash flows more than double from last year on revenues
that jumped +27% to a record $9 billion. Demand has been pouring
in from everywhere: Orders are up +17% in Europe, +18% in the
U.S., +26% in Asia, and a hefty +98% in the Middle East and
Africa.
Overall, the company has received new orders worth $11.3 billion
for the quarter, causing its total order backlog to swell to
nearly $30 billion -- up from just $20 billion this time last
year. And for the first time ever, orders from emerging markets
outstripped those from the developed world.
Yet, despite firing on all cylinders, the company's stock has
been in the doldrums along with everything else lately. As a
result, this well positioned company can now be picked up with the potential to appreciate more than
+70% before reaching its $35 fair value.
Action to Take --> ABB's power divisions alone merit serious consideration --
its other lines of business (which are benefiting from robust
demand from oil/gas and wind energy customers) are just icing on
the cake.
The stock is down right now because short-sighted investors
can't look beyond the next few months and are worried that a
temporary cooling of the global economy will cause all
construction activity to grind to a halt. Those fears are
unfounded, and electricity demand clearly isn't going away.
Analysts predict that ABB is slated for a five-year annual
growth spurt of +21.6%.
With the shares now trading at a highly attractive
price-to-earnings-to-growth ratio (PEG) of
0.54, now is an opportune time to begin accumulating a
stake in this dominant infrastructure player, whose business has
nowhere to go but up.
Nathan Slaughter
Editor
Half-Priced
Stocks
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& 65 certifications, as well as a degree in Finance/Investment Management.
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