ABB Ltd (ADR) (ABB), AZZ Incorporated (AZZ), And Smart Grid Investing

It’s no secret that America needs to upgrade its electricity grid, the infrastructure that delivers power to millions of homes and businesses across the country. While fossil fuels provide the source for most of that power today, renewable energy will be increasingly important as its production costs reach parity with traditional fuels. Even Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.B) has been getting in on the action, with large investments in the solar energy space. So, it’s only natural that Swiss power giant ABB Ltd (ADR) (NYSE:ABB) would follow his lead, recently agreeing to buy power equipment supplier Power-One for roughly $1 billion.

Founded in 1973, Power-One is a manufacturer of high-efficiency, high-density power supply products, with a focus on the renewable energy sector. It is the #2 designer of photo-voltaic inverters, which aid in the conversion and transmission of energy from solar farms to the electricity grid. The company has been a beneficiary of global governments’ desire to grow the renewable energy business through subsidies, with the industry currently forecasting 8% sales growth through 2016.

In FY2012, Power-One reported mixed results, with flat sales growth and a 37.9% decline in adjusted operating profit. While customer demand for its products was strong, with unit volume up 24%, prices dropped sharply due to rising competition. In addition, the company’s profitability was hurt by the need to expand its service staff to manage a larger installed base of customers.

ABB Ltd (ADR) (NYSE:ABB)ABB Ltd (ADR) (NYSE:ABB) is acquiring a leading position in the solar equipment sector, which it will incorporate into its diversified power businesses. The $700 million net purchase price values Power-One at a reasonable 14 P/E multiple and should provide cross-selling opportunities across the combined enterprise. While the renewable energy business relies heavily on government subsidies, it is fast approaching the scale needed for cost competitiveness.

ABB Ltd (ADR) (NYSE:ABB)’s latest acquisition follows on the heels of recent acquisitions in the U.S. market, including last year’s purchase of power equipment supplier Thomas & Betts. In FY2012, ABB reported lackluster overall financial results, with a 4% increase in revenues and an 11% decline in adjusted operating income. The company’s profitability was hurt by poor pricing and growth in its developed markets, especially in the Euro zone, as well as the need to continue to invest heavily in research and development. In response, ABB has initiated multi-year cost savings programs that have targeted supply chain inefficiencies and a simplification of its global operating base.

Since ABB Ltd (ADR) (NYSE:ABB) is looking to profit from America’s pressing need to upgrade its infrastructure, proactive investors should be focused on that area as well. One company that has been increasing its market share in that area is AZZ Incorporated (NYSE:AZZ). Founded in 1956, AZZ is a major producer of electrical equipment for the energy generation and transmission sector, as well as being the largest provider of galvanizing services in North America.

In FY2012, AZZ Incorporated (NYSE:AZZ) reported strong financial results, with increases in revenues and adjusted operating income of 21.6% and 29.4%, respectively, versus the prior year. The company’s sales growth benefited from double-digit increase in sales volumes across its business units, as well as gains from small, tuck-in acquisitions. The company has used strong profits from its galvanizing business to further expand its servicing capabilities, with a current base of 34 plants across the U.S. and Canada.

Looking ahead, AZZ Incorporated (NYSE:AZZ) is forecasting strong growth again in 2013, with a 50% gain in overall sales. Like the rest of the industry, AZZ is hoping to gain from the domestic municipal sector’s need to upgrade its infrastructure, which has become vitally important as electronic communication and commerce continue to proliferate. While government entities have passed the buck on infrastructure spending to date, they will ultimately have to make the necessary investments to maintain economic competitiveness.

The explosive increase in the use of electronic devices has put pressure on an aging electricity grid, necessitating an increase in spending to maintain and enhance the grid’s efficiency and reliability. Investors need to have an allocation to the companies whose products are efficiently connecting the diverse elements in the energy food chain. With a diverse product portfolio, AZZ Incorporated (NYSE:AZZ) is the one to watch as it builds on 26 years of uninterrupted profitability.

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