ABB: Living Well In The Industrial Sweet Spots (Rating Upgrade)

Core Viewpoint - ABB has experienced a significant share price increase of over 60% since the last update, but concerns about valuation arise as the market may have already priced in much of the potential in electrification and automation [2][20] - The company is well-positioned to benefit from a long-term electrification super-cycle, although it faces challenges in its automation and motion segments due to current market conditions [3][8] Electrification - The electrification sector is expected to see strong demand driven by new sources such as data centers, electric vehicles (EVs), and building electrification, alongside supply-side changes like micro-grids and increased renewables [3] - U.S. utility capital expenditures (capex) rose by 10% in 2022 and 11% in 2023, with similar trends observed in the EU, indicating a robust investment environment for electrification [4] - Data centers alone could contribute approximately 0.50% annual growth in U.S. utility capex for many years, with additional drivers including reshoring and increased demand for electricity-consuming automation [5][6] - ABB has a strong position in medium-voltage switchgear and grid automation, with lead times for medium-voltage products around 52 weeks, suggesting a favorable outlook for orders and revenue [7] Automation and Motion - Demand for automation and motion products has weakened, with ABB's Motion segment revenue declining by 6% and Robotics and Discrete Automation declining by 7% in the first quarter [9][10] - The current downturn in short-cycle industrial markets is expected to be cyclical, with some signs of improvement anticipated, although a sharp rebound is not expected in 2024 [11] - Long-term prospects for ABB in automation remain strong, driven by reshoring and an aging workforce, despite concerns about reliance on markets with high automation adoption [12] Management and Strategy - ABB's CEO Bjorn Rosengren will retire in 2024, having successfully improved the company's EBITA margin from 11% to nearly 17% through a streamlining process [13] - The new CEO, Morten Wierod, is expected to continue the focus on growth, with ABB raising its long-term revenue growth targets to 5%-7% annually [14] - The company is exploring growth opportunities through small-to-mid-sized acquisitions, particularly in industrial software, which is seen as increasingly important for future success [16][17] Financial Outlook - ABB is expected to experience strong multiyear demand for electrification products, with projected revenue growth of around 6% or higher over the next five years [18] - While margin expansion opportunities are limited, there is potential for improvement in free cash flow margins, targeting around 8% growth over the next decade [18] - Current valuations suggest that shares may not be particularly cheap, but the potential for super-cycle stories could support continued interest from investors [19][20]