ABB Ltd (ADR) – 3.7% Dividend yield and turn around in global energy infrastructure cycle to provide 40% potential upside

This article is a summary of what I read online. I thought this was interesting to point to readers looking at dividend play and trying to play the upturn in energy infrastructure cycle. The valuation, like those published exclusive on seeking Alpha, is not mine.

ABB Ltd (ADR) - Currently trades at $17.79
Potential Upside by Industry Estimates: $7 - $9
Market Cap: $41B

Cash: $5B; Total debt: $4.6B

Dividend Yield: 3.7%

Shares Outstanding: Approximately 2.29B

Sector: Industrial Goods; Industry: Industrial Electrical Equipment

Trading timeline: 12 - 15 months

What does ABB do?

ABB, the electrical-engineering giant, is enjoying a power surge. The company, which specializes in power and automation technologies, occupies the sweet spot in energy efficiency, and is ringing up increased orders and revenue as corporations and governments around the world seek to modernize buildings, manufacturing practices and the power grid.

Whats the Story:

Despite flirting with bankruptcy less than ten years ago, and its ADR’s down 19%, to $18.26, since the start of the year, and off 34% from a late-April high of $27.58, I would consider this firm an investment candidate and a name to seriously analyze. Why? For starters, ABB is in one of the few firms best positioned to capture the piece of the growing energy infrastructure pie. The International Energy Agency expects global investment in energy infrastructure is going to average $1.5 trillion a year for decades, for a total of $38 trillion by 2035

Possible Catalyst:

·         ABB has spent heavily on research and development and acquisitions. Both types of investments are paying off so far. ABB earned $3.8 billion, or $1.12 a share, in 2010, on revenue of $31.6 billion, and is expected to generate per-share profits of $1.47 this year and $1.61 in 2012. Additionally, ABB returns some of its cash to shareholders via a 67-cent annual dividend per ADR, which equates, at the current stock price, to a sweet yield of 3.7%. The company is expected to shell out $1.48 billion in dividend payments this year, up from $1.26 billion in 2010.

·         ABB trades for 11.5x next year's estimated earnings, a valuation that discounts concerns about global economic growth. The stock can trade at a P/E multiple of 15 to 18 times earnings, which implies a target price of $26.50.

·         ABB's largest shareholder, Sweden's Investor (INVE-B.Sweden), purchased 1.5 million shares in the third quarter, lifting its stake to 7.3%. This marked the company's first ABB purchase in eight years.

·         ABB laid out a five-year plan projecting compound annual growth in organic revenue of 7% to 10%, with mergers and acquisitions potentially adding another 3 to 4 percentage points of growth. The company also modeled five-year Ebitda margins of 13% to 19%, up from a prior range of 11% to 16%.

·         ABB has been helped this year by a pick-up in its power-products division after two years lackluster performance - the division that accounts for 30% of revenue. ABB's profitability owes in part to cost cuts and is working to strip out about $1 billion in costs both this year and next, following $3 billion of cost reductions in the past two years.

·         ABB OPERATES IN ABOUT 100 COUNTRIES, and is benefiting from surging energy use, particularly in emerging markets. The International Energy Agency forecasts total global energy demand increasing by a third from 2010 to 2035, with 90% of the growth coming from developing countries. China, already the world's largest energy consumer, will account for 30% of that. ABB generated 50% of its revenue in 2010 from emerging markets, up from 42% in 2006

·         ABB'S DIMINISHING DEPENDENCE on mature markets however these markets are expected to account for about $4 trillion of the $9 trillion likely to be spent on infrastructure supply between 2010 and 2015. The U.S. and Europe urgently need to modernize aging infrastructure to accommodate more renewable-energy sources and meet anticipated demand for electric vehicles. In connection to this, R&D spending is expected to total $1.3 billion in 2011, or 3.5% of estimated sales, rising to 4% by 2015. ABB has high hopes for direct current, or DC, applications, and is putting the technology, which is more energy-efficient than alternating current, or AC, into data centers and fast chargers for electric vehicles.

·         Revenue from services grew at a compound annual growth rate of about 9% during much of the past 10 years, but ABB is targeting annual growth of between 15% and 20% through 2015. The company expects services to account for 20% to 25% of sales by the middle of the decade, compared with 15% to 16% now.

·         On the M&A front - ABB has shelled out $5 billion in the past 18 months on acquisitions. Its U.S. presence was strengthened with the January purchase of Baldor Electric, a maker of high-efficiency industrial electric motors, for $3.1 billion plus debt; it was ABB's biggest acquisition to date. With regulators demanding greater energy efficiency, Baldor so far has proved an excellent buy: The company's revenue rose 20% in the first nine months of this year, and Ebitda margins exceeded 20%.

·         ABB has also purchased software makers Ventyx and Mincom, which turned ABB into a leader in enterprise asset management, or the monitoring of mission-critical assets. Others seemed natural fits, including the near-$1 billion spent to raise ABB's stake in its Indian subsidiary. Those deals have added 7% points to sales and 9% points to profitability.

·         Management also has tidied up ABB's balance sheet, which boasted $5 billion of cash as of the end of September, against $4.6 billion of debt. Fitch Ratings raised its credit outlook on the company last month to Positive from Stable, putting further distance between ABB's promising present and its darker past.

Capital-goods companies still require caution, but ABB is among the best in class. Who You Gonna Call? The Big Three global engineering outfits all could attract investors.

	ABB / ABB	General Electric / GE	Siemens / SI*
Recent Price	$18.26	16.31	97.12
52-Wk Change	-11.6%	-4.2	-19.5
Market Val ( bil)	$43	173	90
EPS 2012 E	$1.61	1.54	9.51
P/E 2012 E	11.3	10.6	9.5
Dividend Yield	3.7%	3.7	4.0
*Fiscal year ending Sept. 30.		Source: FactSet