Siemens AG (SI) is a major industrial company that specializes in electronics and electrical engineering. Given the complex nature of the conglomerate, many of its assets are trading below intrinsic value and have been brought down by Nokia (NOK) Siemens Network and Osram.
In an earlier post on 3M (MMM), I argued to much criticism that the company should consider spinning off some of its units. While I do not feel that Siemens is in the same position, I believe that the company does need to seriously restructure in a way that unlocks more synergistic value and makes sense to the market.
The conglomerate recently reached an agreement with Nokia to make a 500M EUR capital injection in NSN. I believe that this was the right decision for management to take as it will improve the balance sheet of NSN and give Siemens an opportunity to turnaround the business in a way that recoups lost shareholder value. Siemens will need to also leverage Osram in order to mitigate the growth of Asian competition. The CEO had this to say in the 3Q report:
Regarding Osram, the preparations for the IPO are progressing as planned. Osram saw in the third quarter a slight revenue increase year-over-year. However, Osram’s operating results declined substantially due to higher costs from raw materials, pricing pressure and expenses for leading matters which were partly offset by a positive effect from classification as discontinued operations
With the stock trading at 11.9x and 8.9x past and forward earnings, respectively, while offering a 4% dividend yield, I believe that Siemens is trading a good 25% margin below its intrinsic value. The nice dividend and commitment to returning cash flow to shareholders also provides favorable risk asymmetry for the investment. Below follows my projections for revenue growth by category.
Industry: I anticipate 6.2% average growth from 2011-2013
Energy: I anticipate 7.9% average growth from 2011-2013
Healthcare: I anticipate 1.9% average growth from 2011-2013.
Of the three categories, I remain most bullish on energy and expect strong value creation from oil and gas services. Sales CAGR can be upwards of 12% in this area.
Limited consensus expectations for EPS growth also make for a favorable investment entry point as valuation is suppressed. Overall, my estimates for revenue growth are roughly in-line with other analysts: -1% to $75.2M EUR in 2011, 2% in 2012, and 5.2% in 2012.