ABB Reports Strong Start to 2025 with Solid Q1 Results

Hi everyone, David here. Thanks for opening this week's newsletter.

Navigating choppy market waters? While recent swings can feel unsettling, remember the investor's advantage: the market serves us, it doesn't instruct us. Volatility often creates chances to buy into high-quality businesses at attractive long-term prices.

Speaking of quality, today we're diving deep into ABB – the Swiss-based industrial leader powering the world with essential electrical equipment, from your local grid to major factories. Let's explore why it stands out.

ABB has announced a strong start to the year with solid results for the first quarter of 2025, highlighted by progress across financial metrics and ongoing portfolio management efforts. The company reported comparable order growth of 5% and comparable revenue growth of 3% year-over-year.

Operational EBITA margin reached 20.2%, an improvement of 230 basis points, although this included a significant ~170 basis point impact from a real estate gain. Improvement was seen in three out of four business areas. Free Cash Flow (FCF) from operating activities was $652 million, an increase of $101 million year-over-year, supported by approximately $100 million in proceeds from the real estate sale. ABB expects to improve upon last year's total FCF of $3.9 billion in 2025.

The first quarter saw a positive book-to-bill ratio of 1.16, leading to a total order backlog of $23.0 billion, up 5%. Order growth was strong across all regions, with the Americas up 11% comparable, AMEA up 4%, and Europe up 1%. Notably, China returned to positive order growth, increasing by 13%. Customer activity remained stable to positive in segments like utilities, buildings, and data centers, although some slower activity was noted for a specific hyperscaler customer within the data center segment.

ABB continues its active portfolio management strategy. The acquisition of Siemens' Wiring Accessories business in China was completed, adding over $150 million in revenue in 2024 and expanding ABB's distribution network in the region. The acquisition of Sensorfact, expanding digital energy management, was also completed. ABB also announced plans to invest $120 million to expand US manufacturing at two sites. Looking ahead, ABB plans to propose a 100% spin-off of its Robotics division as a separately listed company, aiming for a second quarter 2026 listing. The rationale is to optimize value creation for both ABB and Robotics, as Robotics is seen as a strong performer with limited synergies with other ABB businesses, allowing it to be evaluated on its own merits. The Machine Automation division is planned to move to the Process Automation business area to build on software and control synergies.

Resilience to Tariffs with Strong Local Sourcing

ABB also highlighted sustainability progress in 2024, including a 78% reduction in own scope 1 and 2 GHG emissions compared to the 2019 baseline, nearing its 2030 target. Products sold in 2024 helped customers avoid 66 megatons of GHG emissions over their lifetime.

For Q2 2025, ABB anticipates comparable revenue growth in the mid-single digit range and the Operational EBITA margin to remain broadly stable with last year’s 19.0%. For the full year 2025, the outlook is for comparable revenue growth in the mid-single digit range, a book-to-bill above 1, and an improvement in the Operational EBITA margin year-on-year. The company acknowledges increased uncertainty in the global business environment.

From a valuation perspective, ABB is sometimes viewed as a company whose future can be predicted with some certainty due to the long lifecycle of its equipment and its established market share. The global trend towards electrification is seen as a secular long-term growth driver. ABB holds a meaningful and stable market share, estimated by IBISWorld to be 9.1% of total industry revenue in the Electrical Equipment Manufacturing industry in the US. However, the valuation currently appears somewhat rich. Morningstar estimates a fair value of CHF 45 per share compared to a recent market price around CHF 42, offering some 10% upside. A trailing Price-to-Earnings (PE) ratio of 22.9 and forward PE of 19 are considered quite high, suggesting a potentially better entry point might be at a lower valuation. While the business is inherently cyclical, influenced by the ebb and flow of capital expenditures, the overarching trend of electrification provides a significant long-term tailwind.