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ABB Suffers from High Costs & Business Integration Issues

Zacks Equity Research

ABB Ltd ABB continues to struggle with the headwinds that have marred its operational performance over the past few quarters. We expect that persistent rise in expenses, high debt levels and ongoing challenges related to the integration of General Electric Company’s GE electrification solutions business — GE Industrial Solutions (“GEIS”) — will hinder the company’s growth.

It’s not surprising that the stock has also put up a dismal show in the recent times. In the past six months, ABB has lost 3.6% against the industry’s rally of 2.3%. Further, the Zacks Consensus Estimate for 2019 earnings has moved south in past seven days from 97 cents to 92 cents.

Read on to find the major factors curbing the company’s growth, and why it may be prudent to avoid the stock at the moment.

Factors at Play

Rising cost of sales has been a major cause of concern for ABB over the past few quarters. Notably, the metric escalated 10.5% and 7.5% in fourth-quarter 2018 and first-quarter 2019, respectively. Notably, in the first quarter, increase in commodity price adversely impacted the profitability of the company by $3 million.

Also, high debt levels have been a concern for the company. In the last three years (2016-2018), the company’s long-term debts recorded an increase of 4.3% (CAGR). Further increases in debt levels can raise the company’s financial obligations. Notably, the stock looks slightly more leveraged than the industry. Its debt/capital ratio is currently pegged at 0.34, higher than 0.28 recorded by the industry.

Moreover, ABB’spolicy of acquiring a large number of companies adds to the integration risks. Frequent acquisitions are a distraction for management, and can affect organic growth over the long term. For instance, in the first quarter, GEIS integration expenses and stranded costs hurt ABB's operating margins by about 100 basis points. As a matter of fact, the company expects that the GEIS integration will dilute its margins in the upcoming quarters as well.

Further, the Zacks Rank #5 (Strong Sell) is subject to various environmental laws and regulations in the countries where it operates. In addition, the company remains quite vulnerable to currency translation risks.

Stocks to Consider

A couple of better-ranked stocks from the Zacks Industrial Products sector are Roper Technologies, Inc. ROP and Flowserve Corp. FLS. While Roper sports a Zacks Rank #1 (Strong Buy), Flowserve carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Roper delivered average earnings surprise of 8.43% in the trailing four quarters.

Flowserve delivered average earnings surprise of 0.49% in the trailing four quarters.

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