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Buy, Sell or Hold: Ford Motor Co.

July 28th, 2008 No comments

By Horacio Marquez
Contributing Editor

Volkswagen AG (PINK: VLKAF), PSA Peugeot Citroen SA (OTC ADR: PEUGY), and Fiat SPA (OTC ADR: FIATY) beat earnings estimates in the last week.  At the same time, however, Ford Motor Co. (F), one of the largest industrial companies in America, missed earnings estimates.

By a lot.

Indeed, the Wall Street consensus called for Ford to lose 27 cents per share – instead, Ford lost 62 cents per share. Even though Ford outperformed in its European, South American and Asia-Pacific operations, the massive undertow of its U.S. operations was just too much to overcome.

That’s not really a surprise, you see, since auto sales in the United States are the weakest they’ve been since 1993, reports J.D. Power and Associates.

U.S. auto sales have been shot down by three key factors:

  • The negative wealth effect of the U.S. housing market.
  • The credit crunch for the last year or so.
  • And, lately, the meteoric increase in the price of oil and gasoline.

All of these detract from consumer wealth and purchasing power even as they weaken the general economy.

But there’s an additional catalyst for Ford’s malaise: While economies of scale in the car industry are very important and volume is critical to allow to keep manufacturing costs down, compensation for Ford’s work force is problematic.

For decades, Detroit’s “Big Three” – Ford, General Motors Corp. (GM) and Chrysler Corp. (now Chrysler LLC) – which once ruled the worldwide auto industry, have been losing their leadership. Call it the typical story of success sowing the seeds of destruction.

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With their global dominance of the auto industry, the U.S. Big Three grew complacent and, despite their market and technological leadership, fell into the trap of granting overly rich compensation-and-benefit packages to their work forces. How rich? The pension plans were super-generous and the health-care plans required no co-payments from workers.

Then came the double-whammy that put the U.S. auto sector on a path to destruction: U.S. health-care costs ballooned and carmakers watched their work forces age, forcing the automakers to assume a massive cost burden – one that they ultimately couldn’t afford.

By 2000, in fact, that cost burden was so huge that the companies were no longer making money from automobile production; any profits they were reaping actually came from their auto-financing arms, which finance auto sales.

These longer-term trends left Ford and GM in a highly vulnerable position. And it likely blunted innovation and kept the companies from quicker development of hybrid vehicle lines.

Then came the energy bubble.

The meteoric rise in the price of oil has put an already heavily cost-burdened U.S. auto industry in a near-panic-mode situation, since customers have shifted away from Detroit’s line-up of trucks and sport-utility vehicles to smaller, more-fuel-efficient cars and hybrids offered by Japanese rivals.

With Ford, at least, there has been major progress on the cost-cutting front. In the first quarter, under the leadership of Chief Executive Officer Alan R. Mulally, the very able engineer who turned around The Boeing Co. (BA), Ford was able to secure a new contract with the United Auto Workers Union that allowed for reductions in 20% of personnel.  This allowed Ford to start the process of discontinuing unprofitable models without having to keep the workers employed.

At the same time, Ford announced cuts of another 4,000 employees in the most recent quarter, and is in the process of starting another round of layoffs of some 15% of salaried personnel.

Ford opted to cut loose Land Rover and Jaguar to raise cash and improve profitability. It’s launching new, fuel-efficient cars and has dramatically improved the quality of its products – especially its cars.

To deal with the recent effects of the economy, it has postponed the launch of its redesigned F-150 pickup truck, which has been the industry’s standard-bearer for decades. That’s a huge move, given that the Ford pickup truck is an icon in the industry, with consumers, with collectors, and even with hot rodders – and has been for generations — reaching all the way back to the Ford Model T and Model A trucks of the 1920s and 1930s.

Managing liquidity and maintaining enough cash to complete the restructuring plan is a big challenge for Ford, given the shifting market tastes and the highly uncertain economic environment.  Should the company successfully navigate these dangerous financial straits, Ford’s stock will likely enjoy a major increase, generating huge capital gains for current stockholders.

But there is a significant probability that the company’s equity holders will get wiped out and the bondholders will end up owning the company. This reality is reflected in the upfront cost of almost 30% in credit insurance needed for certain Ford obligations.

Therefore, while Ford’s restructuring plan seems to be moving forward well and even accelerating in pace, and Mulally has distinguished himself with his execution, the unpredictability of oil prices and the slow resolution of the housing crisis ahead makes this stock very speculative. I cannot recommend it without warning that Ford shareholders must accept a large degree of risk and accept the potential for some pain.

A much better play, yet also with the potential for pain, is to look for convertible debt, with the view that even in a restructuring, bondholders will end up owning the company and capture the huge upside that this franchise will have once it finishes dealing with its problems and is able once more to deliver competitively the high quality products that it was known for.

Action to Take: BUY Ford Motor Co. (but as a highly speculative position). This once-great U.S. automaker may once again find its way, but possibly only after the bondholders end up owning the company. If you are going to buy Ford shares, keep the position small. A BETTER BUY: Ford debt, especially senior convertible issues.
[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 his newly created "Shadow Stock Trader" service. To find out how to subscribe, please click here. "Buy, Sell or Hold" is a brand-new Money Morning feature that so far has covered Cisco Systems Inc. (CS), ABB Ltd (ADR: ABB), Cummins Inc. (CMI), and Chevron Corp. (CVX). We continue to appreciate all the readers who are writing to us, suggesting stocks they’d like to see analyzed.]

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Chevron Says Hurricane Dolly Evacuation Won't Affect Company's Gulf Oil Production

July 23rd, 2008 No comments

By Horacio Marquez
Contributing Editor

Chevron Corp. (CVX) – the No. 2 U.S. oil company and the most-recent topic of Money Morning’s new "Buy, Sell or Hold" feature – said that a hurricane-induced evacuation of its personnel from the Gulf of Mexico should not hamper production.

Chevron on Monday said it was evacuating employees from its Gulf operations in advance of the arrival of Tropical Storm Dolly, which was upgraded to a full-blown hurricane late yesterday (Tuesday). But the evacuation of the Chevron workers hadn’t hampered oil production at that time, and the company didn’t think that it would, said Chevron spokeswoman Qiana Wilson, who declined to quantify how may employees were involved.

With a capacity of about 190,000 barrels of oil per day, Chevron is one of the biggest oil producers in the Gulf of Mexico, according to the Dow Jones Newswires. Other major oil producers reported they were monitoring Dolly on Monday, but hadn’t yet evacuated employees. Royal Dutch Shell PLC (ADR: RDS.A, RDS.B) said it had removed about 185 workers, though also noting the storm would not hamper production, Dow Jones reported.

Tropical Storm Dolly was upgraded to Hurricane Dolly late yesterday afternoon, and was said to have sustained winds of nearly 75 miles per hour, and some further strengthening of the so-called "Category 1" storm was predicted before it hit landfall today (Wednesday), The Associated Press reported.

Hurricane: Cause of Uncertainty, But Not a Cause for Concern

In my "Buy, Sell or Hold" feature that ran Monday, I wrote that "Hurricanes in the Gulf of Mexico also could cause prices [of both crude oil and oil-company stocks] to change very fast, as well." But I also noted that Chevron’s long-term prospects were outstanding.

So let’s take another look at the case I made as I concluded that Chevron’s shares were a "Buy."

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The San Ramon, Calif.-based Chevron resulted from the $36 billion merger with longtime nemesis Texaco Inc. back in 2001. Today it’s a broadly based energy firm whose chief business is petroleum exploration and production. Chevron also is involved in natural gas, chemical production (including commodity petrochemicals), and even plastics.

The company is very solid financially. Last year’s sales of nearly $221 billion represented a 5% increase from the $210 billion in sales reported for 2006. And Chevron’s 2007 profits of $18.69 billion represented a 9% jump from its 2006 profits of $17.14 billion. Chevron’s current market value is slightly more than $177 billion.

At yesterday’s closing price of $85.63, Chevron’s shares are 18% below their 12-month high of $104.53, but 12% above their 52-week low of $76.40. The shares are trading at about 9.45 times current earnings and 10.4 times projected profits, and the stock has a dividend yield of more than 3%.

Anatomy of a "Buy:" Chevron

Let me start my analysis by first noting that Chevron reports its earnings on Aug. 1. In general, I don’t like to trade in or out of a stock just ahead of earnings. The market sentiment prior to an earnings release is very important.  In the case of Chevron, we have seen oil and gas prices plummet from record highs in just the last few days.

Several other factors created a backdrop of uncertainty at the time of my original analysis and rating of Chevron’s shares. First, I initially penned this analysis just ahead of the U.S.-Iran nuclear proliferation talks that were scheduled for the just-concluded weekend – a great example of an event that can cause investor sentiment to shift both quickly and drastically, especially when you’re combining Middle East politics in with a sector that’s as volatile as energy. What’s more, as it’s hurricane season in the Gulf of Mexico, I added that as a potential uncertainty "wildcard" for my Chevron analysis – with the report of a new tropical storm/hurricane creating the potential for a major shift in oil futures pricing, or in the outlook for the company’s profits, should a storm form that was strong enough to force an evacuation, or to cause damage to drilling rigs or refineries.

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No great controversies emerged from the nuke talks, as we subsequently discovered. But my concerns about hurricanes proved well founded, as the emergence of Tropical Storm/Hurricane Dolly shows. To this point, we’re only saying "Hello, Dolly," and hopefully will bid adieux to this inclement incursion – as the Chevron spokeswoman seems to believe we will.

Chevron’s share price, as we noted a moment ago, is down nearly 20% from its 12-month high. As we all know, banks and other institutional investors have been forced to liquidate huge amounts of assets of all varieties in recent months – ostensibly to raise cash and slash their leverage. This is why, so many times of late, that the market seems illogical, or even contrary in terms of the share-price movements that we see.

This vast liquidation continues to hit the losing sectors – such as the so-called "structured products" that contain subprime mortgages.

But most recently, however, this forced selling has even affected the once-high-flying sectors: Positions in oil and gas, stocks in the steel sector that were hotly traded until very recently, and even integrated oil companies such as Chevron and Exxon Mobil Corp. (XOM) have suffered as a result. Many of these stocks have been liquidated regardless of merit, bringing some down to almost "fire-sale" levels.

Should we look to capitalize on some of these fallen stars? You bet.

But here’s the two-part question that you have to ask yourself:

  • When do we buy in?
  • And at what price do we make our move?

Chevron is the kind of company that is capable of continuing to post large profits – propelling its share higher from current levels – even if oil-and-gas prices were to decline during the next 36 months. That’s because Chevron’s business is well cushioned, since refining, marketing and chemicals margins would expand dramatically if market "spot" prices were to decline. Also, the company’s production is poised to expand strongly and Chevron uses some selective hedging that works very well in downside oil markets.

Problems to Vault Over

Chevron was recently forced to reduce its second-quarter guidance to Wall Street, essentially due to losses in its refining and marketing segments (where it underwent major maintenance), and because it suffered some hedging losses.

And yet, despite all these "problems," the second quarter will be a record one for Chevron.

Investors also can expect to hear upbeat progress updates on the company’s key new exploration projects, one of which – the Abgami Project in Nigeria – should begin actual production very soon.

While conceding the near-term results may come in below my expectations, let me say that I still prefer Chevron to the other integrated U.S. oil-and-gas producers because of its higher potential reserves, more-aggressive exploration efforts, and because of an intermediate boost in benefits from production increases in its Kazakhstan, North Sea and West Africa projects.
One problem we have to accept is that this quarter’s disappointment in refining and marketing will linger as a blot on the company’s predictability in the memory of Wall Street’s analyst community, which could hold down the price of Chevron’s shares, or even depress them further in the near term. View these depressed share prices as an opportunity: For investors who don’t yet own Chevron stock, the lower-than-warranted share price could give investors the chance to establish a position in this company’s shares.

In the intermediate term, if it starts to look like Congress is going to do what’s needed and set in motion the changes needed to finally permit exploration-and-production operations in offshore U.S. waters, Chevron will be well ahead of the pack.

So buy CVX shares in progressive stages – starting small before and after the Aug. 1 earnings report – and you could see the stock price escalate some 50% from current prices within a year if the scenarios we’ve sketched out for you here unfold as we expect.

[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 his newly created "Shadow Stock Trader" service. To find out how to subscribe, please click here. Marquez's new "Buy, Sell or Hold" feature in Money Morning has so far covered Chevron, Cisco Systems Inc. (CS), ABB Ltd (ADR: ABB) and Cummins Inc. (CMI). We continue to appreciate all the readers that are writing to us, suggesting stocks they'd like to see analyzed.]

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Buy, Sell or Hold: Chevron Corp.

July 21st, 2008 No comments

By Horacio Marquez
Contributing Editor

Chevron Corp. (CVX), the second-largest U.S. oil company, has recently experienced a decimation of its share price: The stock has dropped nearly 20% from its 52-week high of nearly $105 to Friday’s close of $86.05.

But here’s the thing: At some point down here, Chevron’s stock becomes quite a compelling buy.

Let me explain.

The San Ramon, Calif.-based Chevron is a broadly based energy-sector company that engages primarily in petroleum exploration and production. It’s also involved in natural gas, chemical production (including commodity petrochemicals), and even plastics. In its current form, Chevron resulted from the $36 billion merger with longtime nemesis Texaco Inc. back in 2001.

The company is very solid financially. Last year’s sales of nearly $221 billion represented a 5% increase from the $210 billion in sales reported for 2006. And Chevron’s 2007 profits of $18.69 billion represented a 9% jump from its 2006 profits of $17.14 billion.

At Friday’s closing price, Chevron’s shares are trading 13% above their 52-week low, but 18% below their 12-month high. The shares are trading at about 9.5 times current earnings and 10.5 times projected profits, and feature a dividend yield of slightly more than 3%.
Chevron’s current market value is nearly $178 billion.

Let me start my analysis by first noting that Chevron reports its earnings on Aug. 1st.  As we all know, banks and other institutional investors have been forced to liquidate huge amounts of assets of all varieties in recent months – in order to reduce their leverage and raise cash. This is why, many times of late, that the market seems not to make sense.

This vast liquidation continues to hit the losing sectors – such as the so-called "structured products" that contain subprime mortgages. But recently this forced selling has even affected the formerly high-flying sectors: Positions in oil and gas, recently hot stocks in the steel sector, and even integrated oil companies such as Chevron and Exxon Mobil Corp. (XOM). Many of these stocks have been liquidated regardless of merit, bringing some down to almost "fire-sale" levels.

Should we look to capitalize on some of these fallen stars? You bet.

The question, however, is twofold: When do we buy in and at what price.

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In general, I don’t like to trade in or out of a stock just ahead of earnings. The market sentiment prior to an earnings release is very important.  In the case of Chevron, we have seen oil and gas prices plummet from record highs in just the last few days. And I am writing this ahead of the U.S.-Iran nuclear proliferation talks that were scheduled for the just-concluded weekend – a great example of an event that can cause investor sentiment to shift both quickly and drastically, especially in a sector that’s as volatile as energy. Hurricanes in the Gulf of Mexico also could cause prices to change very fast, as well.

Chevron is the kind of company that is capable of continuing to post large profits – propelling its share higher from current levels – even if oil-and-gas prices were to drop from current levels over the next three years. That’s because Chevron’s business is well cushioned, since refining, marketing and chemicals margins would expand dramatically if market "spot" prices were to decline. Also, the company’s production is poised to expand strongly and Chevron uses some selective hedging that works very well in downside oil markets.

Chevron was recently forced to reduce second-quarter earnings guidance because of losses in the refining and marketing segments, where it underwent major maintenance, and because it suffered some hedging losses.

And yet, despite all these "problems," the second quarter will be a record quarter.

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We can also expect upbeat progress updates on their key new exploration projects, one of which – the Abgami Project in Nigeria – will be kicking into production very shortly.  While conceding the near-term results may come in below my expectations, let me say that I still prefer Chevron to the other integrated U.S. oil-and-gas producers because of its higher potential reserves, and because of an intermediate boost in benefits from production increases from Kazakhstan, the North Sea and West Africa, due to more aggressive exploration.

One problem we have to face is that this quarter’s disappointment in refining and marketing will linger in the memory of Wall Street’s analyst community, which could hold down the price of Chevron’s shares, or even depress them further in the near term. But look at that as a positive: It could even provide investors who don’t already have a position in Chevron shares the chance to do just that.

And if Congress does what’s needed and opens up exploration and production opportunities in U.S. offshore waters, this company will be well ahead of the pack.

So buy CVX shares in progressive stages – starting small before and after the Aug. 1 earnings report – and you could see shares some 50% from current prices within a year if the scenario we’ve sketched out for you here unfolds as we expect.

Action to Take: BUY Chevron. Investors can generate some powerful potential profits from this U.S. energy heavyweight.

[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 his newly created "Shadow Stock Trader" service. To find out how to subscribe, please click here. "Buy, Sell or Hold" is a brand-new Money Morning feature that so far has covered Cisco Systems Inc. (CS), ABB Ltd (ADR: ABB) and Cummins Inc. (CMI). We continue to appreciate all the readers that are writing to us, suggesting stocks they'd like to see analyzed.]

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Buy, Sell, or Hold: Cummins Inc.

July 14th, 2008 No comments

By Horacio Marquez
Contributing Editor

Q: As a newcomer to the stock market, I hear a lot about such companies as Caterpillar Inc. (CAT), Deere & Co. (DE), Komatsu Ltd. (OTC ADR: KMTUY), and others. Yet not much is said about Cummins Inc. (CMI). Do you have any insight, as I own about 2,000 shares?

So begins a letter from one of our more-dedicated readers.

In today’s markets, it is extremely difficult to find winners.  With a market beset by soaring oil and energy prices, the forced liquidation of securities by large financial institutions that are quickly urged to comply with the U.S. Federal Reserve’s capitalization requirements and the rest of the market afraid of its own shadow, rumors proliferate and bear raids abound.

Stocks that already represent a fine value get hit nonetheless and become even deeper bargains. Yet, it is precisely in these circumstances, as the Chicago Board Options Exchange Volatility Index – usually referred to as the VIX Index – is regarded as a proxy for fear in the markets. The index is once again quickly approaching the July 2007, January and March 2008 spikes above 32 that marked the broader market’s tradable bottoms. We have to remain vigilant and look to scoop up bargains if this market ends up as a fire sale.

Enter Cummins Inc. (NYSE: CMI).  This no-nonsense Midwest industrial company is almost 100 years old, has been trading publicly since 1947, and is best known as the maker of bulletproof diesel engines.

But the Columbus, Ind.-based company is actually much more. Indeed, in many ways it’s actually the ideal Money Morning/Money Map Report stock pick: It serves basic industries, is diversified globally and just boosted its dividend payout 40%.
Cummins does business in four areas:

  • Diesel and natural-gas-powered engines (52% of the company’s overall revenue).
  • Electric-power-generation systems distribution systems (19% of revenue).
  • Power-generation systems (19% of revenue).
  • Engine components (10% of revenue).

The company holds leadership positions in all of its product areas. All these lines are in the “sweet spot” of increasing growth rates and margins due to the specific reasons that differentiate them from the rest of the market.

Very importantly, Cummins enjoys strong, sustainable competitive advantages in every segment of its business.  It has well-integrated product plans, focused on being the low-cost producer and developing strong distribution-and-servicing channels in all its markets across the globe.

That translates into consistent market-share dominance for most of its products. What’s more, even though a great proportion (about 45%) of Cummins’ sales come from the U.S. market, the huge spike in oil and gasoline prices has accelerated the U.S. migration into diesel engines, which are more- fuel efficient and have longer lives – and which is the company’s dominant product line.

Diesel engines already are in widespread use overseas, where Cummins derives the remaining 55% of its overall corporate revenue. The company is particularly strong in Europe (18% of sales), Asia/Australia (20%) and Mexico/Latin America (9%).Cummins can expect a big long-term growth boost from its power-generation business, where the company has a big advantage in such product areas as standby, mobile and distributed power generation. This business is growing quickly overseas, because of the inadequacies of the national electricity-distribution grids and the risks to interruption in many emerging economies. 

With global growth across the world established solidly for the next two decades, and especially driven by the vast demands in China and India in power generation due to urbanization and industrialization, this business will be major growth driver for Cummins for years to come.
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The company is very strong financially. Cummins has a market value of $13.4 billion. Last year it reported profits of $739 million on sales of $13.1 billion. Free cash flow was $1.23 billion. For all of 2008, Cummins is projecting that sales will advance 5% to $13.71 billion, while cash flow will increase 6% to $1.3 billion.

The input cost increase due to higher electricity and steel prices should pose no problem to Cummins’ margins, since its market dominance, cost leadership, and the scarcity of these products across the board gives this industrial heavyweight plenty of pricing power. 

At Friday’s closing price of $65.95, Cummins’ shares were down 12% from their 52-week high of $75.09. But they’re 73% above their 12-month low of $38.11. However, there has been some recent weakness, induced by forced liquidations and unrelated factors to Cummins’ fundamentals. Ignore that as a negative: It actually only provides investors with an attractive buying opportunity. This opportunity is available to the very few, since the stock is under-covered by Wall Street, since it is boringly and consistently profitable.

Action to Take: BUY Cummins Inc. (CMI). Investors should rev up their purchases of this major maker of diesel engines and power-management 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 so far has covered Cisco Systems Inc. (CS), and ABB Ltd., ADR: ABB). Readers should feel free to write to us and suggest a stock they'd like to see analyzed.]

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Buy, Sell or Hold: ABB Ltd.

July 7th, 2008 No comments

By Horacio Marquez
Contributing Editor

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.
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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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