Why You Should Consider Investing In ABB
The big news in Phoenix for the last few weeks hasn’t been the heat, the foreclosures, or the horrible record of the Diamondbacks. Nope. Another sports team is grabbing all of the headlines. Our own Phoenix Coyotes.
For those of you who don’t know, the Coyotes are the local NHL team.
Recently, the Coyotes ownership pushed the team into bankruptcy. Honestly, I’m all for supporting local sports, but hockey… in the desert?
Really. Think about it. How is hockey going to catch on in a town with no winter? No ice, no snow. Cold here in Phoenix is when we hit the low 50s. (That’s when the locals break out the big parkas.)
My money’s on the league finding a new home for the team.
As some of my co-workers point out, hockey can be a very exciting sport. It’s fast, sometimes violent, and very physical. It has fans all over the world. Many diehard fans say the most exciting part of the game is a power play.
It’s when one team has been penalized and has to remove a player from the ice.
The other team has a clear advantage with an extra player. The intensity kicks up a notch as the team tries to score.
When I look at investments, I’m always looking for my own advantage… my own power play if you will.
Sometimes it’s just an idea. Sometimes it’s a new product, or maybe a new acquisition. Sometimes I can get the advantage with a bit of information.
That’s when I found my “power play”. Strangely enough, I recently found one in the power industry.
What caught my eye was a little bit of information. The information is simple enough, but it has a far reaching impact. Here’s the information: China is spending $132 billion over the next few years to upgrade their electrical infrastructure.
Think about this for a moment. Electricity is essential to our everyday lives. I bet you’d be hard pressed to think of many aspects of your life not requiring electricity.
Very few people understand the enormous undertaking it is to deliver electricity to a home.
Electricity doesn’t just come from a wall socket. A power source needs to be developed. Power plants need to be built. Transmission lines need to be erected… substations, monitoring stations, converters, switches, transformers. The list of technology needed to power a single light bulb is astounding.
Here’s the thing.
In the US, our power infrastructure is old, and it’s getting older. Millions of dollars are being lost in inefficient transmission. It’s an infrastructure that needs to be revamped, improved, and replaced over time. And that leads to billions and billions of dollars being spent.
But it’s not just the US.
Thousands of miles away, countries like China and India are experiencing population booms. Rapid population growth is accelerating demands for electricity. And growing demand means one thing… more energy infrastructure. It means new power plants, transmission lines, and other infrastructure.
How big will this get?
According to the International Energy Agency (IEA), energy demand is expected to double in the next two decades.
You know what I see in all this? Dollar signs!
That’s right. Infrastructure development, deployment, and upgrades are not easy to do. Not to mention they’re very expensive. IEA expects governments around the world to spend more than $11 trillion (with a “T”) on energy infrastructure. China alone is estimating an infrastructure spend of some $132 billion.
There’s a company I think will grab a really big piece of this spending pie. Let me introduce European energy giant, ABB (ABB).
Never heard of them? They’re like the General Electric of Europe, but with an almost exclusive focus on energy infrastructure. Last year, ABB generated more than $35 billion in sales and produced $4.6 billion in operating income.
But that’s not all.
Incredibly, the company started the year with a $24 billion backlog! Best of all, they have more than $5.4 billion in cash. Not a bad little rainy day fund.
So why do I like ABB?
I really like their specialty. You don’t go to a regular doctor when you need brain surgery. And the same goes for high voltage transmission lines. You don’t call a local electrician to move huge amounts of electricity a long way (say from a power plant to a city). You call a specialist like ABB.
You want to move energy from Norway to the Netherlands… call ABB.
Want to transmit power to the middle of the ocean… call ABB.
Want to connect electric grids in countries like the UK and Ireland… you call ABB.
See a trend here?
I could go on and on about the company. They’re the 800 pound gorilla when it comes to high voltage transmission lines. And as the supplier of choice, they always get the call on new projects.
Let me leave you with one other aspect to consider.
Valuation…
Right now, the company is trading at levels last seen in 2006. Their P/E is low at 13 and they have a dividend yield over 3%. Seems like a great opportunity to buy an industry leader at a great valuation.
Category: Stocks
