On Friday, Morgan Stanley updated its outlook on ABB LTD (ST:ABBN:SW) (NYSE: ABB) stock, increasing the price target to CHF 45.00 from the previous CHF 42.00. Despite this adjustment, the firm maintained its Underweight rating.
The analyst at Morgan Stanley expressed reservations about ABB's investment case, focusing on three main points. First, there is skepticism about the company's ability to achieve its group margin target of 19% in 2026, which would require Electrification margins to exceed 23.5%.
This concern is based on the current trajectory of Electrification margins and the long delivery times for products like medium voltage switchgears, which now exceed a year. Medium voltage products account for approximately 30% of the Electrification business.
Secondly, there is a perceived risk that ABB's later-cycle exposed orders, particularly in Process Automation, may plateau or decline. This is attributed to the company's exposure to the Oil & Gas and Chemicals sectors, which represent 11% of group exposure, and the Automotive sector, which accounts for another 5%. With oil prices and capital expenditures in chemicals and automotive sectors potentially peaking, there may be limited opportunity for order growth to exceed market expectations in the near term.
Lastly, the analyst pointed out that their 2025 EBITA forecast for ABB is 1% below the Visible Alpha consensus. They also noted that the stock's current multiple of 16.5x 2025 EV/EBITA does not leave much room for ABB to outperform the sector on a relative basis heading into 2025. This assessment suggests a cautious stance on the stock's potential to deliver strong performance compared to its industry peers over the next few years.
In other recent news, ABB Ltd (SIX:ABBN)'s third-quarter earnings report showed a mixed performance with orders matching expectations while sales fell short by 3%. The Operational EBITA, however, exceeded forecasts by 1%, with a margin of 19.0%. ABB has adjusted its 2024 guidance, reducing its comparable revenue growth expectation from about 5% to below 5%, while slightly raising its operational EBITA margin forecast from about 18% to just over 18%.
Several analyst firms have recently weighed in on ABB. Citi maintained a Neutral rating with a CHF49.00 target, noting potential for productivity improvements and higher future earnings but also highlighting short-term cyclical challenges. JPMorgan also held a Neutral stance, while Jefferies maintained a Hold rating with a CHF50.00 target. Barclays initiated coverage with an Underweight rating due to concerns over a weaker growth outlook and margins, while CFRA maintained a Buy rating and increased the price target to CHF56.00.
ABB is reportedly exploring the sale of part of its Emobility electric vehicle charging division, possibly retaining its global DC fast charging business while considering the sale of its China DC and global AC operations. These are among the recent developments that have influenced ABB's financial outlook and strategic initiatives.
InvestingPro Insights
Recent data from InvestingPro provides additional context to Morgan Stanley's analysis of ABB. The company's revenue for the last twelve months as of Q2 2024 stands at $23.77 million, with a revenue growth of -5.55% over the same period. This aligns with Morgan Stanley's concerns about potential plateauing or declining orders in certain sectors.
The company's P/E ratio is currently negative at -7.66, which could be a red flag for investors. This is further emphasized by the negative operating income of -$6.65 million and a negative operating income margin of -28.0% for the last twelve months as of Q2 2024. These figures support Morgan Stanley's skepticism about ABB's ability to achieve its ambitious group margin target.
InvestingPro Tips highlight that ABB's stock price has outperformed the S&P 500 in the past year, with a 1-year price total return of 14.53%. Additionally, the company's next earnings date is set for November 7, 2024, which investors should watch closely for updates on the company's financial performance and progress towards its targets.
InvestingPro offers 15 additional tips for ABB, providing a more comprehensive analysis for investors considering this stock. To gain access to these insights and make more informed investment decisions, consider exploring the full range of InvestingPro's features.
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