“The One Thing Every Energy Company Desperately Needs” Money Map

By Travis Johnson, Stock Gumshoe, October 4, 2008

I started yesterday to look at the latest teaser ad from Keith Fitz-Gerald and his Money Map Report — the basic theme of this ad is that the sovereign wealth funds have tons of cash, and Keith thinks he can predict where that money will go.

He teased three companies in that ad — the first one we looked at yesterday was Precision Drilling Trust (PDS), a Canadian income trust that operates as a contract driller and oilfield services company. You can see that article here if you missed it.

This second one is related to the energy business, too, though it’s in a different neighborhood. Here’s what he tells us in the tease:

“Here’s your opportunity to jump on a diamond in the rough that’s about to go up 498%.

“The company I have my eye on is the largest builder of power networks in the world. But that’s not the point. It also provides essential services and equipment. Without them, ExxonMobil couldn’t get off the ground. Here’s why…

“This company has cornered the market on a new transformer that’s safer than anything currently available. It can be used in all kinds of oil and gas applications: furnace control, surface measurement, offshore installations – you name it.

“In fact, it’s the first and only transformer in the whole world that has a near zero failure rate – 0.001.

“How much do you think companies like PetroChina or ExxonMobil would pay to have this ultra-safe technology working for them? Well, judge for yourself…

“The Chinese government just spent $440 million with this company to build a high-voltage electricity line.

“It will be the largest power link on the planet. It spans 1,240 miles, running from Xiangjiaba dam in the west to Shanghai in the east. Without it, Shanghai’s mighty industries would grind to a screeching halt.

“Besides being the longest transmission line in the world, the link will operate at twice the capacity of any power generator in operation today. This represents the biggest breakthrough in capacity and efficiency in 20 years.”

He also gives a couple clues about specific contracts that have been signed:

“Chile just spent $35 million with it to acquire gearless mill drives for their natural resources operations.

“Italy gladly forked over $86 million to have this company design and construct a new oil processing plant in an offshore field.

“Spain just contracted to have Europe’s first large-scale solar energy plant built.

“And this is just the beginning. There are more contracts coming down the pipeline than I can list here – over 27 new contracts worth over half a billion dollars.”

Fitz-Gerald calls his special report about this one the “Power Money Builder” … so what is it?

This spins in the Thinkolator for just a moment before I can reveal that we’re talking about …

ABB (ABB)

I’ve written about this company before — it was a Mark Skousen pick last year, back when the shares looked a little pricey. And to be honest, I was shocked when I looked it up and saw that it’s now trading at less than $18 a share. The ABB name comes from the two companies that formed this massive conglomerate, Asea in Sweden and BBC (Brown Boveri) in Switzerland, and they are primarily known for being the largest supplier of engineering and other services to the world’s electric power companies. Those numbers and contracts mentioned in the tease are accurate, but they do get swallowed pretty quickly by sales that are well over $30 billion a year.

There are certainly reasons why ABB shares have gone down — they are very exposed to the rapid growth of infrastructure around the world, both in developing and developed markets, and they also do a lot of business in services to oil, gas, and mining companies — and we all know the kind of hangover those companies are experiencing with this year’s collapse in commodity prices from their ridiculous highs. All that, and they also design robotics systems for factories, so we’re talking about a lot of cyclical industries.

But still, this does seem a bit overdone. I haven’t researched the company in detail in recent months, but I don’t know of any smoking guns that would cause us to worry seriously about their financial health or long term viability (there may be — you should certainly check if you want to buy shares). And despite the fact that their fates will almost certainly rise and fall to some degree with the level of global economic growth, I would imagine that the desperate need for electrical grid upgrades in the developed world, and for expansion of electricity production in emerging markets, should mean that they will continue to have a pretty solid order book going forward. Their current backlog stands at almost $30 billion, which is impressive but represents only about three quarters of sales at their current pace.

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If you’d like to see the reasoning behind Fitz-Gerald’s recommendation of ABB, it’s probably safe to assume that he’s on the same page as his Money Map colleague Horacio Marquez — you can see a very bullish article about ABB from Horacio here.

So — ABB is certainly a cyclical company, and by most accounts the cycle is painful at the moment. They’re not alone in this, GE and Siemens and the other big energy infrastructure companies have also taken big hits this year. Still, the opportunity to buy ABB at these prices has to be at least a little bit tempting. They are still growing, as of their last quarterly report — double digit growth in revenues, close to 30% earnings growth, enough to get them a decent “grade” from momentum and growth guys like Navellier (he gives it a “B”), but they’re also just plain cheap in many ways. Especially if you think, as many people do, that any slowdown in the economy that significantly slows down US imports is going to cause China’s leaders to flip the switch and start pouring billions more into their infrastructure development, if only to keep the masses employed.

Oh, and if the dollar is going to continue to recover against the euro, the shares could probably get cheaper without the company doing anything. Currency fluctuations can play a pretty big role in ABB’s business, thanks to their global footprint, and in some quarters you’ll see that their performance looks dramatically better in dollars than it does in their local operating currencies, and that can certainly turn around.

So, after doing just a quick fly-over ABB’s numbers, I’m still struck by how cheap the company looks right now. That doesn’t mean that the shares can’t continue to go down, of course — they also looked cheap by many measures back at $25, and at $20 as the financial world fell apart over the Summer. The shares are going for about half the price they commanded back in early June … and they come with a decent dividend yield of about 2.4%. ABB looked awfully expensive when it was trading at a trailing PE of 30, just over a year ago when everyone thought there was no end to the buoyancy of all infrastructure-related stocks … and trading at a PE of 8 or 9 today, it looks foolishly cheap. The analysts are not exactly jumping all over themselves to urge you to buy the shares, but perhaps that’s a good thing — there’s plenty of room for upgrades if folks lose some fear or the world economy doesn’t fall off a cliff (Citi just upgraded them to hold — woohoo!)

I would guess that in a few years we’d look back and see that a price somewhere between the extreme highs of three months ago and today’s price was the “right” one, but in the current environment it’s awfully hard to think of anything that one would find truly shocking.