Schneider Electric's Strong Performance And Long-Term Potential Complicate The Valuation Argument

 

“Let your winners run” is good advice … right up to the point where you end up seeing long-term underperformance because you held on to shares that were overvalued and valuations eventually returned to their long-term norms.

I bring that up because it’s a concern I have with Schneider Electric (OTCPK:SBGSY). Operationally, I have no meaningful doubts that this company will be a long-term winner in electrification, digitalization, and automation, and I still see upside to long-term expectations. This is where “let your winners run” can be good advice – great companies have a habit of outperforming expectations and “growing into” their valuation over time.

On the other hand, in the short run at least, I can’t say Schneider shares are particularly cheap. The valuation isn’t bad relative to many other high-quality industrials, but I find the sector increasingly expensive. All in all, I still lean bullish given Schneider’s strong share in, and leverage to, markets that should outgrow the overall economy, but I wouldn’t fault any investor who holds off in the hopes of buying in on a pullback.

 

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Schneider Electric's Strong Performance And Long-Term Potential Complicate The Valuation Argument

ABB Balancing The Reality Of Familiar Problems And New Leadership Opportunities

ABB (ABB) continues to be a relatively underwhelming, if not disappointing, player in the multi-industrial space, as the company largely missed out on the recent up-cycle due to various execution issues. While process automation and electrification are still performing relatively well, a global slowdown in discrete manufacturing and automation is creating some near-term challenges, and there is a lot left to do in M&A integration and margin improvement.

The announcement of the departure of the CEO could improve the tone somewhat, but this change is not coming from a place of strength and it is going to take time for the next CEO to make meaningful positive impacts – assuming the board lets that happen. While I do still see avenues for ABB to do better, the upside I see is certainly “at risk” and I don’t regard this as a core holding at this point.

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ABB Balancing The Reality Of Familiar Problems And New Leadership Opportunities

Eaton's Challenges Look More Sector/Sentiment-Specific

The call I made earlier this year for preferring Honeywell (HON) and Eaton (ETN) in the industrial/multi-industrial space had been working pretty well through October, but looks more “okayish” now that more machinery-oriented industrials like Eaton have lost some luster. Eaton’s third quarter results had some air bubbles in it, but overall there wasn’t much that worried me and I still think this is an above-average idea in the industrial space. That said, there are growing signs that the cycle is slowing and liking Eaton now means fighting the tape to at least some extent.

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Eaton's Challenges Look More Sector/Sentiment-Specific

Yokogawa Electric Looks Undervalued, But Consider The Reasons Why

The last year has seen a strong recovery in a variety of industrial markets, but Japan's Yokogawa Electric (YOKEY) (6841.T) hasn't seen all that much benefit. One of the top players in distributed control systems (or DCS), Yokogawa's dependence upon petro-sector capex and its substandard margins have both created issues and led to lackluster performance. While the conglomerate nature of the process automation sector complicates comparisons (there's a lot more going on at Honeywell (HON) and Siemens (OTCPK:SIEGY) than process automation), Yokogawa's performance relative to companies like Emerson (EMR), Schneider (OTCPK:SBGSY), Rockwell (ROK), and HollySys (HOLI) hasn't been all that impressive, though it has at least outperformed industry-laggard ABB (ABB) over the past year.

Yokogawa shares do look undervalued on what I believe are reasonably conservative expectations, but the company's reliance on the petro-vertical is a long-term risk in my mind, and I cannot get that excited about the level of execution management has demonstrated over the years, with relatively weak margins and ROICs being the norm.

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Yokogawa Electric Looks Undervalued, But Consider The Reasons Why

Dassault Looks Well-Placed For The Next Era Of Manufacturing, But Valuation Is Problematic

French PLM software leader Dassault Systemes (OTCPK:DASTY) is part of the reason I’m much too gray for somebody in their 40s – while I love the business that the company is in, and its leverage to the ongoing “digitalization” of the manufacturing sector, the valuation is pretty brutal for someone who considers themselves a GARP investor. Although I think investors who put more emphasis on the “Guh” part will be happy with the growth that Dassault delivers in the coming years, the valuation is just too much of a sticking point for me right now… even though it really won’t surprise me if I’m reading this three years from now and thinking, “man… I should have just bought it anyway”.

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Dassault Looks Well-Placed For The Next Era Of Manufacturing, But Valuation Is Problematic

Taking A Cue From Siemens, Rockwell Automation Partners With PTC

With Monday’s announcement of a strategic partnership between Rockwell (ROK) and PTC (PTC), two well-respected and perpetually-expensive players in industrial automation are coming a little closer together. Although this tie-up certainly won’t bring all of the benefits of an acquisition to Rockwell, integrating PTC’s strong IoT offerings with its own FactoryTalk offerings should meaningfully boost the data-gathering and analytical capabilities and advance Rockwell’s Connected Enterprise concept. Rockwell shares still don’t look cheap, but then they rarely do, and if management is right about the increasing role software will play in factory/process automation, this is an important long-term investment.

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Taking A Cue From Siemens, Rockwell Automation Partners With PTC

ABB Seeing Key Markets Starting To Turn

ABB (ABB) hasn’t been able to keep pace with Rockwell (ROK) during this industrial upswing, but the shares of this power and automation company haven’t fared too badly next to Siemens (OTCPK:SIEGY), Schneider (OTCPK:SBGSY) or Emerson (EMR) over the past year, as management has used M&A to patch some holes and as key markets start to turn around. With major end-markets like utilities, oil/gas, and metals/mining only just starting to improve, there could be meaningful late-cycle potential for ABB. Longer-term, opportunities in automation and EV-related spending likewise look promising.

ABB shares still look a little undervalued, which I attribute in part to the fact that the company’s sales haven’t rebounded to the same extent as other industrials (more late-cycle exposure) and also to ongoing worries/doubts about management’s ability to drive margin improvements and better capital efficiency. Although Siemens and Schneider have their merits, and I’d definitely consider Rockwell on a rare meaningful pullback, I think ABB shares still offer enough value to be worth a closer look.

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ABB Seeing Key Markets Starting To Turn

ABB Has To Be Better Than This

When you find yourself slipping into the role of an apologist for a company, that's a good time to revisit whether owning the shares still makes sense. Such is the case with ABB (NYSE:ABB), as this European industrial conglomerate has managed to deliver “not good enough” performance for longer than I'd care to acknowledge. ABB's five-year, three-year, and one-year performances have been better than Emerson (NYSE:EMR), but not up the standards set by Siemens (OTCPK:SIEGY) and Rockwell (NYSE:ROK), and Schneider (OTCPK:SBGSY), too, has seemed to have its house in better order of late. Granted, these are blunt comparisons of businesses, but it does support the idea that ABB has room (and need) for improvement.

There are still bullish arguments to support ABB. I believe the company is underway with plans to make its automation business(es) even more competitive, and I think the long-term potential for electric vehicle-related charging and infrastructure equipment is meaningful. Moreover, the company has the liquidity and flexibility to execute meaningful deals if management wishes to go that route. I still believe 3%-4% long-term revenue growth is plausible (although my 5% to 6% FCF growth rate is looking more tenuous), supporting a fair value around $25.

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ABB Has To Be Better Than This

Emerson Transforming, But Is It Improving?

I haven't been a big fan of Emerson (NYSE:EMR) or its management team in recent years, and the stock's double-digit decline over the last three years does stand out next to the flattish performance of ABB (NYSE:ABB) and Siemens (OTCPK:SIEGY) and the stronger performance of Rockwell (NYSE:ROK) and Honeywell (NYSE:HON). All of these companies have been hurt to some degree by the sharp drop-off in process markets like oil/gas, power, mining/metals and chemicals, but Emerson has been hurt a little worse due to its overexposure to weak markets and some questionable execution from management.

With the sale of the Network Power business and part of the Industrial Automation business, the company certainly has some options to consider as it rethinks its future. Given some past poor decisions regarding M&A and an inability to meet past targets for growth and margin improvement, I think my skepticism toward management isn't unreasonable, and I think Emerson will struggle to replace what it has sold in terms of earnings/cash flow power. Emerson has done better than I thought it might since my last update (although it has still lagged ABB, Rockwell, Siemens, and Schneider (OTCPK:SBGSY)), but I'm just not comfortable with the valuation right now given the considerable challenges that remain.

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Emerson Transforming, But Is It Improving?

Seeking Alpha: Going Its Own Way Has Been Good For Rockwell Automation

There are a lot of things about how Rockwell Automation (NYSE:ROK) runs its business that stand out as different from the likes of ABB (NYSE:ABB), Siemens (OTCPK:SIEGY), Emerson (NYSE:EMR), and Honeywell (NYSE:HON), but it's hard to argue with the results. A strong position in software and controls and a good operating structure have supported attractive margins and returns on capital, while a disciplined sense of what the company is about seems to lead the company away from value-destroying empire building. Looking at the shares, Rockwell lags only Honeywell over the last year and five years and far surpasses ABB, Siemens, and Emerson, and I believe you could argue that Honeywell's share price performance is not all that tied to its automation business.

I have a lot of confidence in the thesis that Rockwell Automation is a high-quality automation company, but I'm not as confident that the shares are a bargain today. I don't necessarily buy into the "peak margin" idea and I believe Rockwell's exposure to less-cyclical markets like consumer products is a positive, but it's tough to get the numbers to work. That said, Rockwell remains an appealing acquisition candidate as well as potential acquirer in its own right and M&A activity could drive more value.

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Going Its Own Way Has Been Good For Rockwell Automation

Seeking Alpha: With Aerospace Squared Away, Will United Technologies Go Back To Big Deals?

Like the roads around most major cities, the construction of a large industrial conglomerate is never finished. United Technologies (NYSE:UTX) is now strongly leveraged to the expected growth in commercial aerospace over the next decade, but the Building and Industrial Systems segment has suffered in comparison. Like most industrial conglomerates, United Technologies doesn't look like a tremendous bargain at today's levels, but I wouldn't underestimate the potential of a value-bidding deal in the next 12 to 18 months.

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With Aerospace Squared Away, Will United Technologies Go Back To Big Deals?

The Motley Fool: ABB Ltd. Ready to Ride a Capex Recovery

Switzerland's ABB (NYSE: ABB  ) is one of those large companies that most people never think about, but wouldn't want to live without the end results of what they facilitate. ABB's automation products allow factories, refineries, power plants, and steel mills to operate smoothly, safely, and efficiently, while its varied products and service in the power market are vital to power generation and transmission. If you believe that Europe's economy is set to turn around and that emerging markets like China will continue to invest in power generation and factory and plant modernization, ABB is a name to consider today.

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ABB Ltd. Ready to Ride a Capex Recovery

Seeking Alpha: One Bad Quarter Doesn't Knock Out ABB

Wall Street institutional investors are paid overreactors, but individual investors have the luxury of taking a more patient outlook in response to a disappointing quarter - that's the benefit of not being judged (and/or fired) after every quarter. That's especially relevant as a host of industrial companies post difficult first quarter earnings.

In the case of ABB (ABB), a few things are clear. First, China has really slowed down, and parts of Europe are feeling the pinch as well. Second, North America is especially strong. Third, the basic equation of helping companies operate more efficiently with respect to energy and labor is still plenty popular out there.

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One Bad Quarter Doesn't Knock Out ABB

Seeking Alpha: ABB - Deja Vu All Over Again

Swiss industrial conglomerate ABB (ABB) has an oddly bipolar record when it comes to its financial reports. Where most companies tend to report streaks of better than expected (or worse than expected) numbers, with ABB it's always a toss-up from quarter to quarter. Although ABB did not end the fourth quarter on a uniformly positive note, the company still looks like an interesting name for the year ahead.

Better Orders, But The Past Intrude
ABB announced that revenue rose 16% in local currencies for the fourth quarter, with organic growth coming in at an impressive 10%. That's remarkably better performance than competitors like Siemens (SI), Emerson (EMR), and Rockwell Automation (ROK), and only Eaton (ETN) and General Electric (GE) showed markedly better performance in overlapping segments.

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ABB: Deja Vu All Over Again

Seeking Alpha: ABB-Thomas & Betts Deal Is A Good One

Swiss multinational industrial company ABB (ABB) has been teasing investors for a little while now. While management has done a laudable job of cutting costs, seemingly everyone has been waiting for announcements with a little more "oomph" -- specifically, deals that can goose the company's growth rate. After more than a few near-misses, ABB found a deal that should make investors happy, as Thomas & Betts (TNB) looks like the right company at the right price.

The Deal To Be
The boards of ABB and Thomas & Betts have agreed on a deal that (if approved by shareholders) will see ABB acquire the company for $3.9 billion in cash. That works out to $72 per share and a 24% premium to Friday's close. In paying over 10 times EBITDA, ABB is hardly fleecing Thomas & Betts shareholders, especially considering that this company has struggled to produce consistently good returns on capital. Nevertheless, there are some definite synergies that should reduce the effective cost to ABB, as well as the prospects of an eventual recovery in the construction markets that make up a sizable percentage of Thomas & Betts' business.

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ABB-Thomas & Betts Deal Is A Good One

Investopedia: Europe Won't Kill Siemens

It's not easy to garner much investor interest in European companies these days, and that's especially true in the industrial/capital goods sector. While it is true that Siemens (NYSE:SI) gets a significant amount of its revenue from Europe, it's also true that this is a globally diversified conglomerate, with numerous opportunities to improve both top line growth and margins. With the CFO of Siemens recently admitting that the company's recent guidance for 2012 may be challenging to achieve, long-term investors may want to keep a close eye on these shares. (For more, see Earning Forecasts: A Primer.)

"Challenging" Doesn't Mean Impossible  
Investors are already inclined towards a "shoot first" mindset when it comes to European capital goods companies, certain that the ongoing sovereign debt/banking malaise has to kill the economy there sooner or later. Siemens did itself no favors when the CFO Joe Kaeser admitted in a Wall Street Journal interview that the company's guidance (which it gave in November) was "very ambitious" and that conditions had gotten worse.

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Investopedia: A Rare Stumble For Emerson

Industrial conglomerate Emerson (NYSE:EMR) offers an interesting case-study for investors after reporting its second quarter numbers. Should investors overlook a small stumble from an otherwise reliable and well-run industrial company, or should investors flee at this first sign of trouble and move into hotter names? 

How an investor answers this question probably goes straight to the heart of their philosophy as an investor. Patient investors who seek out well-run companies for long-term gains should probably think of adding more, while investors who embrace higher turnover may well find it is time to chase faster prey.

Some Turbulence in a Strong Q2 

On the whole, Emerson had a solid second quarter report, but the results were a little shy of analyst expectations - and for better or worse, that does shape a lot of near-term stock performance.

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Investopedia: ABB Needs To Power Up

Swiss automation and power equipment giant ABB (NYSE:ABB) has a lot of what investors say they want these days. Not only does the company have a clean balance sheet and ample dry powder for acquisitions, but ABB has more emerging market exposure than almost any other large industrial company. While investors seem disappointed that the company's power business has not offered much energy of late, the company has done a good job of leveraging the industrial automation recovery and should be in good shape for the eventual recovery in power product demand (which typically lags industrial automation by six to 12 months).

A Good End to the Year
Although ABB's full-year decline in revenue seems disappointing in a world where industrial companies are seeing booming revenue growth, the picture is not all that bleak. ABB reported 6% revenue growth for the fourth quarter, with order growth of 18% and a full-year book-to-bill in excess of one. ABB also reported that EBIT grew 23% in the fourth quarter, due at least in part to well-controlled corporate expenses. (For more, see Utilities Keep ABB A Little Dim.)

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Investopedia: A Siemens Shopping List

Following its rivals ABB (NYSE:ABB) and General Electric (NYSE:GE), it looks like Siemens (NYSE:SI) is preparing to pull out its wallet and try a little more growth-by-acquisition. In an interview with the Financial Times, the conglomerate's CFO Joe Kaeser said that the company had reached a point of "management maturity" and was looking to do deals in the power network and/or plant automation markets worth potentially billions of dollars.  

This is an interesting move for this management team. CEO Peter Loescher has earned high marks for cleaning up and transforming this company and putting it back on a credible growth path. What makes this decision a little more surprising is that a lot of the mess that Mr. Loescher had to clean up was a byproduct of a long series of questionable deals that never really delivered on their price or promise. Perhaps, then, Siemens is tempting fate. Or perhaps a good CEO is a good CEO and Mr. Loescher can successfully integrate deals where his predecessors could not, making M&A a sound use of Siemens' prodigious cash resources.

 
Who's on the Menu? 
At this point, all that Siemens has really declared is that they want to spend billions of dollars in the automation and power markets. Accordingly, that opens a wide range of possibilities for investors to consider. Right off the top, though, investors should forget about ABB, GE or Honeywell (NYSE:HON). The first two vastly exceed Siemens' budget and antitrust officials would go berserk. Likewise, Schneider Electric (Nasdaq:SBGSY) seems too large despite some clear synergies. As for Honeywell, that would seem to involve Siemens moving into too many new and unrelated markets to justify the synergies that may there in areas like automation and power.


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Utilities Keep ABB A Little Dim

For the most part, this earning season has been filled with reports of strong year-over-year growth by industrial companies of all stripes. However, Swiss industrial giant ABB (NYSE:ABB) is not fully sharing in that rebound, as a slower recovery in large-scale power projects is crimping the company's present day growth. 

The Quarter That Was
All in all, ABB did not have a bad quarter - just not a great one. Sales rose 2% organically, while services revenue rose 11%. Though the company did see double-digit growth in discrete automation and low-voltage products, power products were down by double digits and power systems was up only in the mid-single digits.

Looking ahead, though, orders were up a strong 18% on an organic basis, and that was without much help from those power businesses (orders were down 7% in power products, the company's largest single segment).


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