- Spot at all time high and 24.5x PE at 35% premium to average. Bearish RSI divergence at ATH spot
- Weaker manufacturing data over the next few months risks to achieving FY24 margin targets
- 6M ATM IV at a 2YPc18 (5YPc10), attractive to add negative delta
ABB has posted a return of c.38% YtD as the company raised its 2024 margin target to 18% at its 1Q results, implying c.5% upside to consensus EBITDA on the back of strong performance in the Electrification area, achieving a record EBITDA margin of 17.9%. The stock now trades at its all-time high price (Fig. 2) and at 24.5x PE implying a 35% premium to its long-term rating and a 27% premium to the SXNP. A bearish RSI divergence is forming as the stock has broken new highs over the past week (Fig. 3) and with consensus broadly accounting for the raised guidance, particularly in the top line (Fig. 4), and weakening manufacturing data in 2Q, we see a low likelihood of further upgrades to FY guidance and upside surprises at its upcoming 2Q24 results on the 18 July.
Although the strong 1Q performance in the Electrification area could continue, potential weakness in the Process and Robotics & Discrete Automation could disappoint due to benign short-cycle demand. The Robotics and Discrete Automation saw a 30% decrease in orders (Fig. 5), particularly in China, as machine builders hold back new orders due to earlier pre-purchasing, while the 20% decrease in Process Automation orders was attributed partially to delays in large projects and softer underlying demand.
Looking at the remainder of the year, manufacturing demand appears to be weakening again with the June Eurozone Manufacturing PMI dropping to 45.6, a six-month low, (47.3 May), the 15th consecutive month of declining output due to decreases in new orders and employment while the US ISM Manufacturing PMI also unexpectedly declined to 48.5 in June (48.7 in May), below forecasts of 49.1, printing the third consecutive month of decreasing activity and the lowest since February (Fig. 6). Although, we do not believe the company will scale back its full-year expectations as early as its 2Q results, a further deterioration in manufacturing data over the next quarters increase the likelihood of an earnings miss or the market recalibrating its expectations in light of a deterioration in what was expected to be a significant improvement in industrial demand.
6M ATM IV at 5YPc10 is attractive to add negative delta to the stock and we propose Dec24 46 puts at a net cost of 1.6% of underlying (Spot ref:51.7, Fut ref:52.0). We chose the Dec expiry to cover 3Q results too, as we anticipate that any deterioration in orders is unlikely to be significant as early as 2Q. Should the price drop by 10% the strategy would return c.5.3x on the premium employed.