Bloomberg News

ABB Less Optimistic on Growth as Debt Crisis Takes Toll

October 27, 2011

(Adds shares in fifth paragraph, company outlook in ninth paragraph.)

Oct. 27 (Bloomberg) -- ABB Ltd., the world’s largest maker of power-transmission gear, reported third-quarter profit growth that almost stalled, missing analyst estimates, and said it can’t give a detailed forecast as the economic outlook darkens.

Net income rose 2 percent to $790 million, missing the average estimate of $870 million by 19 analyst in a Bloomberg survey. That’s the smallest quarterly profit gain in a year at ABB. Sales rose 18 percent to $9.34 billion, also short of an analyst survey of $9.61 billion.

Chief Executive Officer Joe Hogan said it’s challenging to make forecasts because of the debt crisis and concerns about the availability of capital in Europe. His muted outlook contrasts with more upbeat expectations in June, when he said predicted “strong demand” for ABB’s products, which range from electricity transmission lines to factory robots that help assemble cars.

“The slowdown was to be expected, and now we can see it,” said Takis Spiliopoulos, an analyst at Bank Vontobel. He recommends clients buy the shares.

ABB rose as much as 0.27 Swiss francs, or 1.6 percent, to 17.52 francs. Stocks rallied across the region after European leaders agreed on a plan to expand a bailout fund to stem the region’s debt crisis. ABB had fallen 17 percent this year before today, valuing the company at about 39.93 billion Swiss francs.

Cutting Expenses

Schneider Electric SA, the world’s biggest maker of low-and medium-voltage equipment, reduced its 2011 profit goal on Oct. 20 for the second time in four months because of rising labor costs in emerging markets and said it may cut jobs.

ABB cut costs by $750 million in the first nine months, closing in on a goal to reduce expenses by $1 billion this year. Hogan is slashing expenses at the Zurich-based company in an effort to fight rising input costs. The company started hedging against price swings in silver, a key element to make some of its components including switches, after prices for the metal rose in the second quarter.

“We have to be careful in a sense of making sure our costs are in line and that we anticipate any dramatic economic downfall so that we are prepared for it,” Hogan said in a corporate video message posted on YouTube.

Surprising Resilience

Some industries showed “weaker demand” in the quarter, reducing the pace of order growth in the company’s low voltage products and discrete automation and motion businesses, he said. Growth in most of ABB’s early-cycle businesses “will remain near current levels until confidence in the macroeconomic outlook improves,” Hogan said.

He refrained from giving indications as to when growth at the company’s other businesses may be revived.

ABB is “somewhat shell-shocked by the slowing in the short cycle and withdrawing any suggestion of a near term rebound in the later cycle power segments,” said Alex Barnett, an analyst at Jefferies International.

Earnings before interest and taxes as a percentage of sales fell to 12.8 percent in the quarter from 14.6 percent last year. They declined to 13.3 percent in the power products business, ABB’s largest by sales. The margin held up “surprisingly well” at 13.9 percent when adjusted for one-time effects and currency swings, compared with 14 percent last year, analyst Spiliopoulos said.

Order intake rose 20 percent to $9.83 billion. The company won a $1 billion order in August to connect North Sea wind farms to the German electricity grid, the largest transmission order in its history. While orders of that magnitude are rare, the company may receive two to three orders of similar size per year in the future, especially in its power systems business, Hogan said.

So-called base orders, contracts below $15 million which form the bulk of new business at ABB, rose 11 percent in the quarter, ABB said. Large orders advanced 17 percent and made up 22 percent of the total, compared with 20 percent a year earlier.

--Editor: Benedikt Kammel

To contact the reporter on this story: Richard Weiss in Frankfurt at rweiss5@bloomberg.net.

To contact the editors responsible for this story: Benedikt Kammel at bkammel@bloomberg.net.


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