Upgrading ABB Ltd. To Buy
The global economic growth - coupled with the attendant demand for power and automation - that stimulated investment in new and expanded plants over the last 12 to 24 months, is expected to continue to some degree during 2008. Further, ABB Ltd.'s (AVP) outlook should be aided by its continuing revitalization efforts. The company's impressive menu of offerings - as well as the substantial increase in its year-end 2007 backlog together with management s guidance for 2008 - have prompted us to upgrade our opinion to Buy, a move supported by our six-month target price of $29.92, which is15.5% above Chicago Bridge and Iron Company's (CBI) current market price.
Almost immediately after the departure of its Chief Executive - Fred Kindle, who left over 'irreconcilable differences' - ABB released summary results for 2007. Net profit in Q4-07 rose to $1.8 billion, which is more than four times the $422 million it earned in Q4-06. Revenues in Q4-07 were $8.7 billion versus $6.9 billion. Results were helped by the sale of the Lummus Global oil and gas production unit to CBI for $530 million, as well as a $475 million tax benefit; together, those two items totaled just over $1 billion.
The company reported net income of $3.8 billion for 2007 against $1.4 billion in 2006. Orders rose by over 10% for the year, as demand remained strong around the globe for ABB's products and services used to increase energy efficiency, deliver power more reliably and improve industrial productivity. The company indicated that it expects growth rates of around 15 to 20 per cent in 2008 for its power-related activities and about 10 per cent in its automation business. Also, the company announced that it would raise its dividend to $.044 per share and it will buy back $2 billion worth of its shares.
Dassault Systemes Stays A Hold
Dassault Systemes (DASTY) reported weaker than expected revenues for the fourth quarter of 2007 primarily due to unexpected weakness in CATIA seat growth and lower than expected service revenues. It continues to forge strategic alliances and partnerships to stay ahead of competition. We have maintained our revenue estimates for 2008 while increasing our earnings outlook due to improvement at the gross margin level. We expect DASTY to continue to raise its payout ratio slightly to 30% for 2008 and beyond.
We continue to rate the shares of Dassault Systemes a Hold, and have tweaked our price target to $61.50 over the next six months or 24.1x our new 2008 earnings estimate of $2.55 per share Dassault is a proven leader in its field and garners a high price-to-earnings multiple. At 22.9x our 2008 earnings estimate or 20.8x our new 2009 estimate, the company is priced around 2.1x to 2.3x its long-term growth rate. We continue to believe the company should sell for 24.1x our new 2008 earnings estimate of $2.55 per share, which we have increased after its fourth quarter results due to improvement at the gross margin level, and after adjusting for our currency outlook.
We use US GAAP as opposed to Non-GAAP earnings, as we believe that stock-based compensation is a part of doing business and should be included in the company's financial results now that 2007 has been concluded and we will have a reasonable comparison for 2008 and 2009. We also believe that since the company has taken on acquisitions as a normal part of business, amortization of these intangibles becomes a cost of doing business as well. We expect DASTY to continue to raise its payout ratio slightly to 30% for 2008 and beyond. Given a payout ratio of 30%, we would expect the dividend in 2008 to be around $0.46 - $0.50 a share based on the company's 2007 earnings.