On Tuesday, Goldman Sachs adjusted its stance on ABB LTD (ST:ABBN:SW) (NYSE: ABB), downgrading the stock from Buy to Neutral while maintaining a price target of CHF52.00. The investment firm's analyst cited the stock's significant re-rating and margin improvements as key factors for the change in rating.
According to the analyst, the previous Buy rating for ABB was based on the expectation that the company would achieve above-sector organic growth, propelled by its medium voltage (MV) and Process Automation segments. Additionally, it was believed that ABB's high return on invested capital (ROIC) and potential for margin expansion were not fully recognized by the market.
Over the past four years, ABB has seen substantial margin enhancements, which in turn has led to a change in the stock's valuation. The company's stock has transitioned from trading at a 1% discount compared to the sector based on a 12-month forward EV/EBIT to trading at a 34% premium at present.
The analyst's unchanged 12-month price target of CHF52 implies a modest upside of approximately 6% from the current stock price. This valuation reflects the new perspective on the stock's growth potential and market position following its recent performance.
The downgrade to Neutral by Goldman Sachs suggests a more cautious outlook on ABB's stock, indicating that the previous growth expectations and market underappreciation have now been largely factored into the current stock price.
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. Morgan Stanley maintained its Underweight rating and increased the price target to CHF 45.00, expressing reservations about ABB's ability to achieve its group margin target of 19% in 2026. 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.
On the strategic front, 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 Goldman Sachs' downgrade of ABB. The company's revenue for the last twelve months as of Q2 2024 stands at $23.77 million, with a concerning revenue growth of -5.55% over the same period. This aligns with Goldman's more cautious stance, as it suggests challenges in maintaining the robust growth rates that previously supported a Buy rating.
InvestingPro Tips highlight that ABB's revenue growth has been decelerating, which corroborates the analyst's view on the company's changing growth dynamics. Additionally, ABB's stock price has seen a significant decline, with a -14.53% total return over the past year, indicating that the market may be adjusting its expectations in line with Goldman's downgrade.
For investors seeking a more comprehensive analysis, InvestingPro offers 20 additional tips for ABB, providing a deeper understanding of the company's financial health and market position.
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