ABB Q2 Earnings Miss, Shares Gain on Robust Order Growth - Analyst Blog

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ABB Ltd. ( ABB ) reported second-quarter 2014 earnings per share of 28 cents, missing the Zacks Consensus Estimate of 30 cents and tumbling 15.2% from the prior-year figure of 33 cents.

Despite lower-than-expected bottom-line result and year-over-year decline, the company shares have gained about 2.5% following the earnings announcement on Jul 23, reflecting the investors' confidence in this power and automation technology company.

The company's earnings had been impacted by the continued weakness in its Power Systems segment. This apart, the performance of Process Automation and Power Products segments were also below expectations. However, investor confidence was likely reinstated by strong order growth. All of the company's segments except Low Voltage Products reported healthy increase in order levels. Additionally, in the quarter, the company witnessed a robust recovery in large orders especially in the Power Systems.

Total Revenue & Orders

Revenues for the quarter were approximately flat year over year at $10.2 billion but lagged the Zacks Consensus Estimate of $10.5 billion. Service revenues represented 16% of the total revenues, which were flat year over year.

Total orders received during the quarter increased 14% compared to last year. Large orders (order value above $15 million) grew significantly, representing 14% of total orders received in the quarter, compared with 9% in the year-ago quarter.  Base orders (order value below $15 million) were also up 9% driven by growth in most of ABB's early-cycle product businesses. Service orders rose 12%, constituting about 17% of the total orders, in line with the prior-year quarter.

Segment Results

Discrete Automation & Motion revenues increased 7% in local currency to $2.5 billion. Orders for the segment increased 11% to $2.7 billion. The segment growth was driven by increased robotics revenues and higher demand for early-cycle products  especially in general industry and discrete manufacturing sectors which fully offset the unfavorable impact of a lower opening order backlog in large motors and medium-voltage drives. The order growth was primarily driven by a robust increase in base orders.

Low Voltage Products revenues were $1.9 billion, up 1% in terms of local currency.  The segment reported a 1% decline (in local currency) in orders to $1.9 billion. The segment gained from revenue increase in product businesses and systems.

Process Automation revenues decreased 5% in local currency to $2.0 billion. The revenues were impacted by the weakness in marine and mining businesses which was partially offset by the strong execution of order backlog. Order level increased 15% in local currency to $2.0 billion. The increase came on the back of improvement in both large and base orders which were driven by the strength in the marine and pulp and paper sectors. Regionally, order growth was strong in Americas and Asia, it remained flat in Europe and declined in the Middle East and Africa.

Power Products revenues were $2.7 billion, declining 3% in terms of local currency. This was due to lower opening of the order backlog. However, orders for the segment increased 7% in local currency to $2.8 billion as the demand from the industrial and power distribution sectors remained strong. Moreover, investments in some of the large transmission projects also improved. Geographically, order growth was strong in developing nations like China, India and Brazil. Order levels in North America also witnessed growth despite reduced order levels from Europe.

Power Systems revenues were $1.8 billion, down 7% in terms of local currency. Revenues declined due to lower opening of the order backlog and execution delays in some selected projects. Orders in Power Systems surged 39% in local currency to $1.8 billion. Order growth came on the back of increase in large orders, primarily the receipt of Canada based $400-million HVDC (high-voltage direct current) link project. The base orders in the segment also grew in double-digits.

Income and Expenses

Income from operations declined 11% year over year to $1.1 billion. Operational earnings before interest, taxes, depreciation and amortization (EBITDA) in the quarter totaled $1.3 billion, down 15% year over year.

Other Financial Aspects

ABB's cash flow from operations increased 64% year over year to $888 million during the quarter. However, net debt increased to $3 billion at the end of the second quarter of 2014 from $1.5 billion at the end of 2013.

Divestiture

The company remains focused on streamlining and optimizing its portfolio. In the quarter, ABB revealed its decision to sell off Thomas & Betts' steel structures business for about $600 million. The all-cash transaction is likely to be closed in the third quarter of 2014. Prior to this the company had also divested Power-One's Power Solutions business for about $120 million to Bel Fuse Inc. ABB has also closed the $260 million divestment of Thomas & Betts' heating, ventilation and air conditioning business in the quarter.

Outlook

ABB maintains a positive long-term outlook. The company aims to improve its efficiency by focusing on cash flow generation, cost containment and stabilizing its Power Systems business in 2014. Moreover, increasing demand for reliable electricity, rising investments in grid upgrades and the tendency of industries to spend more on automation solutions to increase energy efficiency and productivity bode well for the company. However, short-term uncertainties continue to linger along with the persisting macroeconomic volatility.

ABB currently has a Zacks Rank #3 (Hold). Some better-ranked stocks that can be considered at present include EnerSys ( ENS ), AO Smith Corp. ( AOS ) and Emerson Electric Co. ( EMR ). While EnerSys sports a Zacks Rank #1 (Strong Buy), both AO Smith and Emerson Electric Co. have a Zacks Rank #2 (Buy).


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: ABB , EMR , AOS , ENS

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