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Economic worries in Europe continue to impact the manufacturing sector. Siemens (SI) has been particularly susceptible, with negative economic forecasts expected to continue to impact demand for industrial goods. However, the steady economic recovery of the U.S. has helped to pick up some of the slack in demand. Moreover, there are new opportunities in the industrial sector, primarily in the area of grid storage, which is expected to be worth $10 Billion as reported by Yahoo Finance.

The question that lingers in the investor's mind remains: will the negative issues outweigh the positives, or will it be the other way around?

Industry Analysis

The industry is showing a relatively stable outlook for this year, as the United States is showing some signs of slow economic recovery along with an improvement in the employment record. However, other countries are still experiencing economic troubles, particularly the eurozone, which is affecting the demand for industrial goods and hitting exports.

Revenues of industrial goods companies, particularly the big three: Siemens, General Electric (NYSE:GE), and ABB Group (NYSE:ABB) are declining (as shown in the below chart) due to several factors, which includes the rising cost of raw materials, in addition to the decrease in demand for industrial goods.

(click to enlarge)

According to the recently published second-quarter figures, revenue for the second quarter was at €18.011 billion, a 7% decrease from its prior-year level. Siemens's quarterly revenue change for the first quarter of 2013 is at -5.06%, which is the lowest among its rivals, General Electric and ABB, which posted first-quarter revenue changes of -4.08% and 0.54% respectively.

Recent company projects and growth potential

New orders climbed up 20% on the back of major orders, which came in the second quarter. Its latest project involves supplying drives to Australia's largest resource project - the Cape Lambert Port B project, which may help in driving up declining revenue. Another project in place is related to grid storage and renewable energy sources like the FERC Order 890. This market is predicted to be a $10.4 billion market in 2018, as reported by Lux Research Boston, and is also expected to be dominated by major players in the industry like Siemens, General Electric and ABB.

Due to the rising cost and decreasing demand, companies like Siemens are looking for alternative ways to boost their profits - and there appears to be a number of options. In addition to moving into these growth areas, the company has been increasingly focusing on cost-cutting strategies. Siemens has been aggressive in cost cutting for the past two years, cutting an additional 3,000 jobs earlier this year in order to meet internal cost-cutting goals. These cost-saving strategies, coupled with some asset sales, have helped to offset its downward trend in revenues.

Attractive Valuation

Comparative data, below, shows that Siemens is currently trading at a discount relative to the industry's average.

The trailing P/E ratio of the company is at 15.25, which is lower than the company's peers - as is the forward P/E ratio. P/B is currently at 2.64, which is, again, lower than the industry average.

Financial Ratios and Performance

On the other hand, the company's Quick ratio, which is currently at 0.59 as of the second quarter, is a potential cause for concern. This ratio shows the company's lack of capacity to cover short-term requirements.

Moreover, there has been a decrease in revenue and net income, 15% and 3% respectively, in the second quarter of this year as compared to the same period of 2012. These issues of slower demand from Europe along with an increase in raw material costs will continue to make things difficult for Siemens in the near term.

Recommendations

I would recommend holding Siemens in anticipation of a long-term rebound. It may not happen overnight, but the company's darkest days seem to be behind it. Importantly for investors, this does not yet appear to be reflected in its share price. The current valuation indicates that the stock price is relatively undervalued as compared to the industry average. However, the financial status of the company indicates a need to continue cutting some costs and selling some assets. Recent acquisitions, along with continued economic recovery, should help put Siemens on more secure footing (acquisitions will need to be a topic for a different day). Although, issues pertaining to its quick ratio and decreases in revenue and net income are dampening the sentiment on this stock, things seem to be moving in the right direction.

Source: Siemens: Attractive Valuation But Needs Financial Stability