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ABB Hit by Surging Costs and Business Integration Challenges

Zacks Equity Research

On Apr 15, we issued an updated research report on ABB Ltd ABB.We believe that rising costs, high debt levels and ongoing challenges related to the integration of GE Industrial Solutions (“GEIS”) will likely continue troubling the company in the quarters ahead.

It’s not surprising that the stock has also put up a dismal show in the recent times. Notably, in the past three months, ABB’s shares have gained 2.8% compared with the industry’s rally of 11.8%.

Read on to find the major factors affecting this Zacks Rank #5 (Strong Sell) company’s prospects and why it may be prudent to avoid the stock at the moment.

Factors to Consider

Escalating costs and expenses have been a major cause of concern for ABB over the past few quarters. Notably, the company’s cost of sales increased 10.5% and 10.2% in fourth-quarter 2018 and full-year 2018, respectively. Notably, in the fourth quarter, rise in commodity price had an adverse impact of $15 million on the company’s profitability. The company perceives that flaring prices of its key inputs like steel, copper and aluminium might continue denting its bottom-line performance in the upcoming quarters.

Also, high debt level is a cause of concern for ABB. Notably, in the last three years (2016-2018), the company’s long-term debts recorded an increase of 4.3% (CAGR). As a matter of fact, further rise in debt levels can increase the company’s financial obligations. Notably, ABB stock looks more leveraged than the industry. Its debt/capital ratio is currently 0.3, higher than 0.2 recorded by the industry. This makes us cautious toward the stock.

Moreover, ABB’s policy of acquiring a large number of companies adds to the integration risks. In this regard, costs associated with integration of GEIS hurt the company's Electrification Products segment’s operating margins by about 200 basis points in the fourth quarter. As a matter of fact, the company expects that the GEIS integration will continue to dilute its margins in the upcoming quarters as well.

Furthermore, given ABB’s extensive geographic presence, its operations remain exposed to various environmental laws and regulations risks, as well as currency translation.

Key Picks

Some better-ranked stocks from Zacks Industrial Products sector are DXP Enterprises, Inc. DXPE, Regal Beloit Corporation RBC and Brady Corporation BRC. While DXP Enterprises sports a Zacks Rank #1 (Strong Buy), Regal Beloit and Brady carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

DXP Enterprises delivered average positive earnings surprise of 46.55% in the trailing four quarters.

Regal Beloit pulled off average positive earnings surprise of 4.27% in the last four quarters.

Brady delivered average positive earnings surprise of 5.71% in the trailing four quarters.

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