Buy, Sell or Hold: ABB Ltd.

When I coined the term "global synchronic growth" a few years back, I must have had ABB Ltd. (ADR: ABB) in mind. Global synchronic growth is the simultaneous expansion of most of the major economic zones around the world, which spurs investment and creates vast amounts of wealth. Up until now, this development has been largely a consequence of the pro-growth policies adopted by the "Group of Eight," or G8, countries, as well as accelerating growth in the increasingly important "BRIC" economies of Brazil, Russia, India and China.

Going forward, however, investors can expect an additional boost from a $40 trillion global infrastructure boom. And one of the biggest beneficiaries from this massive surge in infrastructure outlays will be Zurich-based ABB, a leading global provider of electrical-system services and components.

With a market value of roughly $63 billion, ABB is the world's leading builder of power networks, making it one of the real heavyweights in a sector that includes such rivals as America's General Electric Co. (GE) and Germany's Siemens AG (ADR: SI). ABB is truly global in focus.

Over the last several months, for example, ABB has announced deals of $233 million in Korea, $74 million in India, $170 million in the Sweden-Finland region, $53 million in Dubai, and $70 million in China, just to name a few.Infrastructure modernization is one area of economic development in which no country with global-growth aspirations can afford to lag. And that's especially true when it comes to power generation, where the consequences of neglect can be huge.  Research demonstrates an almost perfect correlation between electricity-demand growth and economic growth. In recent years, we've seen blackouts from Barcelona to Johannesburg, with measurable fallout each time.

BRIC economies such as China and India, which are expanding at rates of 9%-10% annually, are consuming massive amounts of additional power to make that happen. Energy is in the headlines every day, with crude oil establishing new record highs virtually every day. In fact, the World Energy Outlook from the International Energy Agency points to China and India as the areas of highest growth in energy infrastructure for decades to come - and ABB is perfectly positioned to take advantage of this.

And that's what makes ABB such a great stock, especially right now.

Unlike consumer-oriented markets - where a large percentage of the spending is discretionary, and gets cut back when times get tough - infrastructure spending is a virtual necessity, meaning governments and companies cannot cut back on their outlays for roadways, water systems and power-generation-and-distribution systems.

And we have a huge trend towards urbanization in China and India that will continue strongly, despite the current market turmoil.  To give you an idea, China and India will account for 45% of the $22 trillion investment in infrastructure needed to meet demand growth over the next 20 years.  And both countries are awash in money that can be deployed into infrastructure projects.
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ABB is a company of superlatives.  They have been in business for 120 years and now lead the world markets in both power-transmission and power-management systems, as well as in industrial-automation products and systems.  In power, about a quarter of the company's sales emanate from high-growth Asia and about a half come from Europe.  In the automation field - where growth is steady, though unspectacular - ABB has installed more than $100 billion of these systems through the years, which at least provides the company with an ongoing source of revenue for replacement parts.

ABB spends as much time focusing on internal improvements as it does on market opportunities. It constantly re-examines its "core competencies" to make sure it remains at the head of the pack, and it also strives to consistently improve its internal operational efficiency.

These initiatives are leading to an ongoing expansion in ABB's profit margins. That, in turn, should boost ABB's competitive position vis-à-vis the very few other global firms that have the ability to tackle the massively complex, highly technical power projects that are being built in the emerging markets today.

We like ABB's clear commitment to its shareholders. Back in April, the company said that sales growth would average 8%-11% a year for the period from 2007-2011. Profits will advance at an even-brisker 11%-16% during the same period. The company also announced plans to buy back $2 billion worth of its own shares - almost always a positive sign for stockholders.

At ABB's annual shareholders' meeting in May, interim Chief Executive Officer Michel Demare said the company is "relatively little exposed" to the global financial crisis and noted that powerful global trends are in place to support the company's business for years to come. The firm's first-quarter revenue rose 17% on a year-over-year basis, and net income reached $1 billion, a jump of 87%. Orders rose 16%, topping the $10 billion mark for the first time ever.

ABB still intends to create 20,000 new jobs over the next five years, in order to deliver on those strategic objectives.
At Friday's close of $27.37, ABB's shares are down about 18% from their 52-week high of $33.39, and are 34% above their 12-month low of $20.42.

In terms of the valuation on ABB's shares, you have to take a very close look at the ultra-low "PEG" ratio (Price/Earnings ratio divided by the Earnings Growth Rate). For a company of this quality, a PEG ratio of 1.0 or less is a steal - and ABB is trading at 0.79! 

As we noted earlier, ABB should deliver double-digit growth this year, which means that the stock should rally nicely from its current level. The next earnings report is scheduled for July 24, and we're expecting the results to beat expectations. Analysts are anticipating a good quarter and are raising earnings estimates.

To be sure, ABB does face some challenges. There's a slowdown in Europe. Authorities in China and India are actively battling inflation, which might cause these economies to slow. However, these slight slowdowns shouldn't affect ABB in a meaningful way, given the huge deficiencies in infrastructure that both these countries face, and the overall global push for additional generating capacity for clean, reliable power.

We would advise investors to buy ABB shares up to $30 a share; but given the current market volatility, and the fact that the stock already has consolidated, look for downdrafts in the stock price to establish an initial position or to pick up additional shares. Cautious investors might want to wait and see the results of the quarterly report - if the announcement is close at hand, as it is, now (the risk, of course, is that investors who follow this strategy could well pay a higher price in return for added degree of certainty that comes with knowing the actual results).
Action to Take: BUY ABB. Investors should plug into this global supplier of power-generating systems.

[Editor's Note: Horacio Marquez was working as a vice president of the Merrill Lynch Emerging Markets Fixed Income Group in 1994 when he correctly predicted that both Argentina and Mexico were headed for currency crises - cementing his reputation as an expert on both the emerging markets and on the nuances of global finance. Now Marquez brings that expertise to you with the newly created "Shadow Stock Trader" specialized trading service. To find out how to subscribe, please click here. "Buy, Sell or Hold" is a brand-new Money Morning feature that last covered Cisco Systems Inc. (CS).]

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