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ABB Suffers From High Costs & Buyout Integration Issues

Zacks Equity Research

On Aug 13, 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”) buyout are likely to affect the company in the quarters ahead.

Year to date, ABB's shares have declined 2.7% against the industry's growth of 1.4%.

Read on to find the major factors affecting this Zacks Rank #4 (Sell) company’s prospects and why it may be prudent to avoid the stock at the moment.

Factors to Consider

Rising costs and expenses have been a major cause of concern for ABB over the past few quarters. Notably, on a year-over-year basis, the metric jumped 7.5% and 7.6% in the first quarter and the second quarter of 2019, respectively. In addition, the company is experiencing softness in the Robotics & Discrete Automation segment due to significant low orders on account of headwinds in discrete industries. As a matter of fact, ABB expects the softness to persist in discrete industries in the near term, which might adversely impact its results in 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 its financial obligations. Notably, ABB stock looks more leveraged than the industry. Its debt/capital ratio is currently 0.39, higher than 0.28 of 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 buyout (June 2018) hurt ABB's operating margins by about 60 basis points in second-quarter 2019. As a matter of fact, the company expects the GEIS integration to continue diluting its margins in the upcoming quarters as well.

Key Picks

Some better-ranked stocks from the Zacks Industrial Products sector are Zebra Technologies Corporation ZBRA, Albany International Corporation AIN and Tetra Tech, Inc. TTEK. While Zebra Technologies currently sports a Zacks Rank #1 (Strong Buy), Albany International and Tetra Tech carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Zebra Technologies pulled off average positive surprise of 5.61% in the last four quarters.

Albany Internationaldelivered average positive surprise of 15.98% in the trailing four quarters.

Tetra Tech came up with average beat of 8.72% in the preceding four quarters.

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