Industrial gains: ABB & SHAW

by Elliott Gue, editor Personal Finance

Industrials stocks focus on the manufacturing, transport and construction of physical goods and heavy infrastructure.

The best in the sector share one key trait: powerful leverage to a global economic recovery led by growth in the emerging markets and renewed spending on basic infrastructure across the developed world. The S&P 500 Industrials has outperformed the broader market by 20% during the past year.

The average US coal-fired power plant, the workhorse of the grid, is more than four decades old. That capacity must be replaced in coming years. And the electricity transmission grid itself will be modernized to improve efficiency and reliability.

The biggest source of revenues for Shaw Group (NASDAQ: SHAW) is building conventional coal and gas-fired power plants as well as next-generation nuclear facilities.

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Shaw -- a holding in our growth portfolio -- owns a 20% stake in Westinghouse and handles design, engineering and construction work related to Westinghouse’s AP1000 nuclear reactor. Currently, the company is performing work on 10 new reactors worldwide, four in China and six in the US.

A nuclear renaissance is underway, led by strong growth in nuclear capacity in developing countries. In the US, the loss of the Democrat’s super-majority in the Senate means that a comprehensive cap-and-trade energy bill is unlikely to pass in 2010.

The focus in Washington has shifted to more bipartisan measures such as encouraging the growth of emissions-free nuclear power and environmentally friendly natural gas-fired facilities; President Obama has proposed some $54 billion in loan guarantees for nuclear facilities in his new budget.

Shaw Group’s $22 billion backlog of projects includes $12.3 billion in power-related projects and $5.4 billion in engineering and infrastructure (E&I) deals. E&I projects include several jobs for the Army Corps of Engineers in New Orleans and plant construction for the Dept of Energy to process weapons-grade plutonium into nuclear fuel in Aiken, South Carolina.

Switzerland-based ABB (NYSE: ABB) operates primarily in two sectors: automation and power systems. The former division includes sales of robotics and power management devices that improve the efficiency of manufacturing and industrial operations.

The latter sells components systems and services used to build, monitor and maintain power plants and electricity transmission grids. ABB is a solid play on both my manufacturing and power themes.

Emerging markets overtook developed economies in 2009, capturing 51% of ABB’s total orders. Amid a solid rebound in industrial and manufacturing activity as well as a renewed focus on investment in electricity infrastructure, orders from developing countries jumped 15%. Orders from mature economies declined 19 percent.

Fourth-quarter 2009 revenue was the second-highest on record despite the global downturn, and the backlog of unfilled orders remains near its all-time high.

In 2009 China and India each accounted for more than $1 billion in new orders; in the fourth quarter, Chinese orders were up 2% and Indian orders surged 72% amid a rebound in demand for industrial equipment and continued investment in power technologies.

Saudi Arabia and Russia each contributed between $500 million and $1 billion in orders last year. Orders for equipment related to the oil and gas industries increased substantially.

A continued cyclical recovery in manufacturing and heavy industry worldwide should power order growth in 2010, and the backlog looks poised to hit new highs. Meanwhile, an aggressive cost-cutting plan should boost profit margins. ABB is a new addition to the our growth portfolio.

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