Siemens (SI) is an internationally diversified and integrated technology company that derives its revenues from four major business segments: infrastructure and cities, industry, energy and healthcare. Here is a review of Siemens' first quarter results and potential for future growth.
For the purpose of analysis I have used exchange rate of 0.7255 Euro per dollar. Siemens' financial results remained quite satisfactory during the first quarter of fiscal year 2014. The economic conditions were not in favor for some business segments and these conditions had a negative impact on the revenue results. The orders for the first quarter rose quite impressively by 9% year-over-year to $28.72 billion and revenues rose by 3% to $23.88 billion. The infrastructure and cities segment's (a mix of transportation and logistics, power grid stations and products, building technologies) performance led the growth in orders for the other segments with an increase of 45% including orders worth $2.2 billion for two driverless subway lines in Saudi Arabia. Infrastructure and cities remained the core revenue generating segment with 5% growth in revenue to $6 billion compared to the same quarter last year.
As the natural resources are depleting rapidly and use of non-renewable resources creating larger challenges for energy industry. Siemens Energy segment's orders declined by 2% to $9.8 billion compared to the same quarter last year. The lower activity of oil rigs and lower demand for fossil energy resulted in an 8% decrease in revenues to $7.97 billion in the first quarter. The revenues for Siemens will be hit unless the company starts investing in alternative environmentally friendly energy resources.
According to researchers, despite technological advancements the healthcare industry is lagging behind in technological development. Siemens' reduction in research and development expenditure by 0.6% compared to the previous year is a clear indication of the falling profitability of the healthcare segment. The lack of innovation caused lesser healthcare orders for Siemens and resulted in a 5% fall in the revenues to $4.26 billion in the first quarter.
Siemens Industry segment is combination of industry automation and drive technologies. In the first quarter Industry segment also performed well in terms of orders and Industry orders rose by 8% primarily due to major contract wins. However the revenues were adversely impacted and decreased by approximately 2%.
The growing orders and revenues helped the infrastructure and cities segment's profits and net income. The profits and higher margins resulted in a significant increase in profits of $455 million. The key factors included effective execution of projects in the transportation and logistics and favorable business mix particularly within the power grid solutions and products segment.
The energy segment of Siemens also showed strong growth of 23% and profits rose to $697 million. Siemens' recent offshore wind project Cape Wind Associates is worth $2.6 billion and includes a contract of $965 million in the United States for the supply of turbines for five wind projects that primarily lifted profits.
Overall, the Siemens industry segment's profit margin slightly declined to 11.2% from 11.5% resulting in reduced profit of $664 million reflecting a 5% decrease. The improved profitability of the industry automation division was offset by lower profits from the drive technologies segment.
The healthcare segment performed poorly in terms of profits and the first quarter profit margins declined to 15.2% from 15.5%. The adverse and uncertain market conditions of the healthcare industry restricted the profits to $652 million from $696 million. Other factors that impacted the profits were relatively weak economic conditions in Europe, excise tax on medical devices in the U.S., and slowing growth in China.
First quarter net income increased to $2 billion reflecting an increase of 20% from $1.67 billion a year earlier and the corresponding basic EPS rose 20% to $2.3 compared to $1.96 in the previous year.
The energy segment of Siemens is the core business and contributed about 33% towards revenue for the first quarter. According to the Global Wind Energy Council the average annual market growth rate for the 2013-2017 periods will be almost 7%, ending up with an annual market in 2017 of 61 GW. According to estimates it is expected that Europe, North America and Asia will show significant growth in the wind industry sector. Siemens is the largest supplier of offshore wind turbines and its recent wind energy projects for clean and sustainable energy will definitely contribute towards its future growth.
The healthcare segment generated approximately 18% in revenues for the first quarter and is lagging behind in adding growth for the company due to its lack of sufficient investment towards innovative healthcare technology. According to the Global Industry Analyst report as the world's aging population increases the demand for the healthcare sector is likely to reach $3 trillion by the end of 2015. The telemedicine sector that facilitates interactive healthcare through telecommunication technology is expected to grow 20% annually by the end of 2015. The technological development and potential for wireless technology will cut down the cost improving profit margins for manufacturers. I expect that Siemens' strategic management will foresee the potential growth of the healthcare industry and will invest in the near future to fuel its growth prospects.
Siemens' infrastructure and cities segment has shown tremendous growth in its orders of 45%. According to the American Road and Transportation Builders Association, overall the U.S. transportation market will grow 5% from $129 billion to $135.8 billion in 2014. Siemens is already in a strong position to benefit from this market growth and I believe that this business segment will be the key growth contributor for Siemens.
Siemens posted strong first quarter results with a good net income growth rate and EPS. Over the past twelve months Siemens' share price reached $130.32 from $104.32 reflecting investors' confidence in the company. According to Siemens the overall economic condition will be challenging for the company in different markets. However keeping in mind the potential industry growth and Siemens' recent initiatives to cut down costs, the net income is expected to grow by 15% and that will ultimately provide better returns to investors. Therefore I offer a buy rating for this stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article