GE vs. Alstom vs. ABB - Backlog and Bookings

Trouble Ahead  or Trouble Behind ? 

Why Examine Backlog and Bookings ?

Most observers believe Backlog is the most critical metric for pricing capital equipment companies.  

Owners might do well to compare the respective Backlogs and Bookings of GE, ABB, and Alstom. All three of these Enterprises supply equipment with lead times expressed in years.   A large turbine-generator set might have a lead time of 36 months from time of order placement. The Backlog represents  some 9 to 12 months future revenues at these 3 Enterprises   

Therefore, Backlog and Bookings information can provide insight to the owner of these Enterprises of their likely performance 12-24 months out. Backlog and Bookings information also provides owners broader economic signals.  Bookings represent booked orders often with a progress payment due with 30 days of issuing the PO.  A PO coupled with a progress payment is a leading indicator which owners can judge reasonably reliable. 

Owners seldom have such solid data on leading indicators. Owners would be wise to examine and compare Bookings data carefully. 

GE vs. Alstom vs ABB: Backlog and Bookings 

Owners can reach some preliminary conclusions based on the summary information presented above. The last row in the spreadsheet, Change in Absolute Backlog is illuminating. Backlogs declined 12% to 20% year over year.  

The decline in absolute backlog is consistent with macro-economic data. Customers and end users have little need to order new equipment when capacity utilization is low.  50% peak-to-trough declines in absolute backlog are possible over a cycle as old orders are shipped and no new orders are booked. 

These companies have only seen 12-19% declines in their Backlog. Therefore, owners can expect further backlog declines. Further declines are likely even with Emerging Market GDP growth remaining above 6%.  Emerging Markets still do not provide the majority of these 3 OEM's revenues. 

As the Backlog declines, operating managers become more concerned about marginal costs and marginal productivity. Manufacturing facilities for heavy equipment have shockingly large fixed costs which need to be covered by direct labor. Direct Labor may only be 5% - 12% of the COGS of an order.  Activity Based Costing  (ABC) has reduced distortions caused by the old style Burden Rate calculations. However ABC, still has not eliminated the need for order to cover overhead. A small decrease in direct labor (ie orders flowing through a facility) will have a dramatic effect on fixed cost coverage.  

Pressure to book orders to fill the plant becomes greater with every new order that is shipped. Owners need to carefully monitor gross margins and actual warranty costs (not provisions) to determine if inappropriate orders are being accepted. 

Another key metric for owner's to watch is Months of Revenue in Backlog.  A steep decline in this number will indicate either a) future declines in revenues or b) declines in quality of revenues (ie margin destruction). General Electric has seen a 17% drop in months of revenue in its equipment backlog (note, the numbers cited for GE are only for their equipment and service backlog - not the entire enterprise). Owners can expect that revenues for GE's equipment groups to decline by this scale by 1Q '10.  

Both Alstom and ABB have been able to manage their Months of Revenue in Backlog rates more consistently than General Electric.  Owners can expect pressure to accept 'bad orders' to be lower at Alstom & ABB than at GE in the future.  Owners might reasonably predict that revenues over the next few quarters will be more stable at Alstom and ABB than at General Electric. 

Tenders Up = Orders Up ?

ABB provided this most illuminating graph in its latest quarterly report. It is supposed to indicate a continued boom in activity. Tender activity are useful proxies for future orders. Tender activity is a soft number and is subject to any number of distortions. Gudovac believes ABB's managers are incorrect in concluding a record number of tenders equals a record number of orders - soon. 

One could also conclude from the data that a record number of projects are being red lighted at the last minute.  A tender may go out and then the project is delayed, and delayed, and delayed, and..... Many Projects may have been put on long term hold until more economic certainty returns.  Owners need to continue to monitor trends in this data for all OEM's. 

 

GE Backlog as of 30.June 09

 

GE's backlog slide was cleverly constructed. As Gudovac has noted before, GE's managers are the supreme masters of the craft of the Power Point Presentation.  This slide seeks to obscure the fact that the equipment backlog has shrunk by 17% y.o.y.  Viewer's attention is directed towards the blue and green graph which suggests backlogs are steady at $169 Billion.  

However, GE's best leading indicator of future business is new equipment orders. Gudovac appreciates that GE's managers are showing service booking information. This indicates they are serious about the effort to promote high margin service revenue.  GE's managers have promoted service in its own right for a long time.  Owners can be pleased that Service has a solid foundation at GE> 

 

Alstom Backlog as of 31. March 09

Alstom's presentation of its backlog information is clear and concise.  The breakout of service is welcome. Alstom's service business represents approximately 30% of its revenues. In the downturn, Service will represent possibly all of  Alstom's profits. Service tends to have a shorter cycle time. Therefore, Owners should balance backlog change with service growth. Alstom's Owners will need to watch the Service side of the Enterprise closely throughout the down cycle.   

ABB Backlog as of 3o. June 09

ABB provided Owner's with a number of slides presenting a a solid amount of data in a most compelling fashion.  The long term backlog trend graph shown here describes just how quickly the backlog situation has changed at ABB. A  trend graph for Alstom and GE would likely indicate a similar situation. Of particular note for Owners is the steep decline in large orders (orange). 

Until large orders expand, one can not expect significant growth in top line revenue.  

GE vs. Alstom vs. ABB  Backlogs and Bookings

The backlog and bookings information for these 3 OEM's provides a critical insight for the Owner.  At both Alstom and ABB, the next year's results are going to be rather predictable. GE's results will be less predictable due to the impact of GE Capital upon GE Industrial. However, in all 3 cases,  Mr. Market appears to focus closely on the latest results, instead of understanding how the current backlog will flow through the next few quarters. Owner's may be able to take advantage of Mr. Market's myopia. 

Owners don't need the Grateful Dead to tell them if there is Trouble Ahead  or Trouble Behind ? - the backlog tells them exactly what lies around the next bend. 

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Don't Get Massacred !

Gudovac1941

Methodology Thoughts and Observations

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