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ABB Ltd. (ABB) Beats on Q4 Earnings; Macro Issues Linger

ABB Ltd.ABB reported operational earnings per share of 33 cents, down 5% year over year. Steady revenues and diligent cost-saving initiatives helped maintain earnings; however, it was more than offset by tough macroeconomic and geopolitical conditions which ultimately affected revenues. However, earnings beat the Zacks Consensus Estimate of 27 cents.

Despite the beat, ABB's shares were down 2.6% in pre-market trading , as global economic uncertainty and geopolitical developments signal mixed prospects for the company.

Operational earnings for the full year came in at $1.29, up 3% year over year.

Quarterly revenues were down 3% year over year and came in at $8,993 million. All round weakness and declines in the mining and oil and gas markets proved to be headwinds, more than offsetting steady execution of a healthy order backlog in the Power Grids space. Individually, revenues took a beating in three of the four segments of the company, thus dragging the overall top line. However, revenues came ahead of the Zacks Consensus Estimate of $8,914 million.

For full-year 2016, revenues were down 5% as declines in Discrete Automation and Motion and Process Automation offset growth in Power Grids and Electrification Products. Total services and software revenues grew 3 percent (0 percent in US dollars) to 17.8

Revenue by Segments

Discrete Automation & Motion (down 3% to $2,211 million): Sales remained steady on strong demand trends in robotics and the light industry; but declines in oil & gas industry arrested the unit's momentum. However, orders of this segment inched up 1% to $2,013 million on a year-over-year basis. The company said that this segment's electric vehicle charging, solar and power quality businesses were to be transferred to Electrification Products segment, effective Jan 1, 2017, due to expected synergistic prospects.

Electrification Products (flat year over year at $2,462 million): Good execution of the systems backlog and higher demand in building products supported revenues. Orders were down 8% year over year to $2,157 million on account of persistent poor performance in the U.S., Canada and the UK. The transfer of the electric vehicle charging, solar and power quality businesses is likely to have a dampening effect on this unit's margin.

Process Automation (down 10% to $1,737 million): Revenues were down in this segment, particularly due to declines in discretionary spending in oil & gas and related sectors. Orders declined 15% to $1,520 million, owing to lower capital spending in process industries and constrained discretionary spending in process industries.

Power Grids (down 2% to $3,042 million): Currency fluctuations and adverse dragged the revenues, despite steady execution of a healthy order backlog. Orders rose 10% to $2,879 million mainly due to significant large contract awards.

Total orders remained steady year over year at $8,277 million and were up 3% on a comparable basis, driven by large contract awards. Base orders shrunk 1% on a year-over-year basis, while large orders went up 35%. The order backlog at quarter end amounted to $23 billion (down 1% year over year).

On a geographic basis, European countries, namely Spain, Norway and the UK witnessed order growth, which was more than offset by order declines in Turkey, France and the Netherlands. Orders were steady in the Americas, as the U.S. grew 9%, offsetting declines in Canada and Brazil. The Asia, Middle East and Africa (AMEA) witnessed robust performance with order growth in India and China, which more than offset order declines in Saudi Arabia and other parts of South East Asia.

Book-to-bill ratio at the end of the fourth quarter was 0.92, up from 0.89 in the comparable quarter a year ago.

Operational earnings before interest, taxes and amortization ("Operational EBITA") in the quarter under view dipped 4% year over year to $1,057 million.

Next Level Strategy: Stage 3

In the third quarter, ABB launched the third stage of the revamped version of its "Next Level Strategy" which focuses on three areas, namely profitable growth, relentless execution and business-led collaboration. This stage calls for restructuring the company's divisions into four market-leading entrepreneurial businesses, unlocking its full digital potential, increasing momentum in operational excellence and boosting the company's brand.

ABB will restructure its business into four segments: Electrification Products, Robotics and Motion, Industrial Automation and Power Grids, and the same will be effective from Jan 1, 2017. Further, in order to unlock its digital capabilities, ABB recently announced a strategic partnership with Microsoft Corporation MSFT , to shore up its capabilities in the industrial internet market, by combining cloud technology with industrial digital technology. Together, the companies will develop next-generation digital solutions on an integrated open cloud platform.

Moreover, ABB is optimistic about its White-Collar Productivity savings program, which has surpassed expectations since its launch. Consequently, the company has raised the cost-reduction target under the program by 30% to $1.3 billion. Further, ABB is currently implementing its regular cost-savings programs to achieve savings equivalent to 3-5% of cost of sales each year. Another transition which the company is launching is to adopt a single corporate brand, by consolidating all its brands across the world under one umbrella.

ABB Ltd Price, Consensus and EPS Surprise

ABB Ltd Price, Consensus and EPS Surprise | ABB Ltd Quote

Liquidity & Cash Flows

ABB's cash and cash equivalents as of Dec 31, 2016 were $3,719 million compared with $4,565 million as of Dec 31, 2015. Total long-term debt fell to $5,800 million at the quarter end, from $5,985 million as of Dec 31, 2015.

ABB's cash flow from operating activities came in at $1,519 million for the fourth quarter compared with $1,994 million in fourth-quarter 2015. The decline reflected ABB's focus on more stable quarterly cash generation throughout the year.

Divestitures and Partnerships

During the third quarter, ABB decided to sell its global high-voltage cable system business to NKT Cables in a deal worth $934 million. The high-voltage cables unit is part of ABB's $11.6 billion Power Grids business. High voltage cables are the key components in sustainable energy networks.

ABB and NKT Cables have also signed an agreement for a long-term strategic partnership, under which they will work together on future projects, in areas like sub-sea interconnections and direct current transmission links.

ABB considered the offloaded unit as a niche business, which had been improving in recent times. However, the company is facing what will likely be the end to Europe's offshore wind-power boom years, as the industry grapples with shrinking investments and uncertainty over future subsidies.

At the heart of it, the cables deal is part of ABB's active portfolio management and will make the core power grids business simpler, stronger, and more focused.

Alongside, ABB also announced two important partnerships. It signed a partnership deal with engineering and construction firm, Fluor Corporation FLR . The deal was signed to cater to the growing needs of power grids worldwide for safe, dependable and state-of-the-art electrical substations. Through the strategic partnership, ABB and Fluor will execute large turnkey engineering, procurement, construction ("EPC") electrical substation projects.

Further, ABB formed an agreement to partner with Aibel to deliver offshore wind integration solutions. Per the contract, Aibel will be responsible for turnkey EPC services for the design, construction, installation and commissioning of the offshore platforms; while ABB will focus on high-voltage direct current technology.

Per ABB, the two new alliances, in addition to greater focus on higher-margin consultancy services and software, will help elevate the Power Grids unit's margin target to 10-14% (up from a previous target of 8-12%).

Share Repurchase

At the end of the third quarter, ABB declared the completion of the $4-billion share buyback program introduced in Sep 2014. Under the program, the company repurchased approximately 171.3 million shares for about $3.5 billion.

Consequently, ABB announced a new share buyback program of up to $3 billion from 2017 through 2019, reflecting consistent strength in cash generation and financial position.

To Conclude

ABB's fourth-quarter results recorded a rise in its quarterly orders for the first time since first-quarter 2015, driven by large contract awards. However, earnings still suffered from the uncertainties plaguing the process industries, from which the company derives a significant portion of its profits.

Notwithstanding the turnaround in orders, energy markets are not expected to stabilize anytime soon, thus dampening ABB's short-term prospects. Lower capital spending for ABB's key upstream energy end-markets and foreign exchange volatility will likely continue to hurt its financials. The company is vulnerable to increased uncertainty stemming from the Brexit decision as well as geopolitical tensions elsewhere in the world, which are overshadowing global markets.

Despite the negatives, we believe that the company's long-term growth prospects are stable. The company's three major customers in utilities, industry, and transport & infrastructure are likely to drive growth. Apart from this, positive development in electricity value chain, rapid progress of Internet of things, services and people and a surge in energy-efficient transport and infrastructure bode well.

Zacks Rank & Stocks to Consider

ABB currently sports a Zacks Rank #1 (Strong Buy). Another company in the same space as ABB is II-VI Incorporated IIVI , carrying the same rank as ABB. You can see the complete list of today's Zacks #1 Rank stocks here.

II-VI Incorporated develops, manufactures, and sells engineered materials and optoelectronic components and products worldwide. This company has registered a remarkable positive average surprise of over 59.2% for the four trailing quarters, driven by four remarkable consecutive beats.

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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 Nasdaq, Inc.


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

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