ICLN - ABB: High Valuation Meets Industrial Headwinds - Time To Exit?

2024-07-01 09:14:38 ET

Summary

• ABB's shares have significantly outperformed the S&P 500 since 2019, but most of the operational improvements have already been implemented and the company's valuation now appears significantly stretched.
• The challenging economic outlook and high interest rates are expected to limit future growth and profitability, with recent financial results already reflecting some of these pressures.
• The company's guidance for 2024 shows only modest growth expectations, and the elevated valuation metrics, such as a P/E ratio of 28x, are difficult to justify.

We were optimistic on ABB's ( ABBNY ) turnaround potential in 2019, when we initiated covering the company. Since then shares have outperformed the S&P 500 index (SPY) on a total return basis by more than 2.5x. More recently we updated our rating to "Hold" as we began to see risk and reward relatively balanced, with the turnaround almost complete and shares looking fairly valued. A little over six months have passed, and in that short time period shares have gained an additional ~25% compared to ~14% for the S&P 500, despite mixed financial results. As a result, we believe shares are now clearly in overvalued territory, and a "Sell" rating is more appropriate....

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