ABB Undervalued As The Next Phase Of Its Evolution Begins

 

For a company that was perpetually restructuring over the last two decades, what CEO Bjorn Rosengren has accomplished in two years at ABB (ABB) impresses me. The company has embraced decentralization with gusto and starting moving more definitively in terms of rearranging the portfolio (selling Dodge, looking to IPO the charging business, spin-off turbocharging, and so on). With that, margins have improved and the company's credibility on the Street is substantially higher.

Now comes the next phase – growing off of this improved base, and this offers a different set of challenges and risks than the prior phase. I like ABB’s leverage to electrification and automation, two of what I believe will be the dominant trends over the next decade, but there will still be challenges to navigate, including the ongoing question of whether ABB has invested enough in software capabilities.

ABB has been a modest underperformer since my last update, but not by a wide margin. I still see core revenue growth potential of around 4% long term, as well as high single-digit to low double-digit FCF growth, and with that I think ABB is priced for a high single-digit long-term annualized return; good enough to keep it at a buy in my book.

 

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ABB Undervalued As The Next Phase Of Its Evolution Begins