We derive our TP of SFr62 using the average of our DCF and SOTP valuations. For the SOTP, we use  EV/EBITA multiples for divisions (in line with respective divisional peers), implying c19x multiple for the group. For the DCF we use a WACC of 6.9, a through-cycle margin of 20% and a terminal growth rate of 2.5%.

Risks that could prevent the shares from achieving our target price include:

Competition: Some of ABB’s businesses are becoming more competitive, including through the rise of emerging markets competition. Increased capacity and unusual pricing behaviour by new competitors may present a risk to future earnings.    

Acquisitions: As with many industrial companies, ABB augments organic growth with acquisitions. While some of ABB’s recent acquisitions appear to have created value, others do not yet cover their cost of capital on our estimates. Returns from future deals are hard to predict, and so estimating returns from cash deployment through future M&A is a challenge.    

Project execution: Some of ABB’s divisions, notably in Industrial Automation, include project-related businesses where ABB incurs project risk. While the company is addressing past problems, some residual contract risk is likely to remain.