Sometimes with great companies we wonder, what happens when the leader departs? We wonder whether the firm can forge on without his strategic direction and continue making the great products and services they are known for. Other firms, however, are more resilient. They are institutions with a distinct history, process, and strategic foresight which can run well regardless of who the leader might be.
With such firms, shareholders retain confidence of the firm's strategic prospects for many years as they are dependent upon the sum total of institutional knowledge that resides within the firm. It is my goal to look for enduring institutions to invest in as it gives me the conviction to stand behind my investments even when returns struggle in the near term.
We've found that times of macroeconomic uncertainty tend to depress prices of otherwise very solid firms. Given the uncertainty in Europe, I believe value opportunities may be found there among high quality firms. It is in that vein that I propose Siemens AG (SI).
Siemens is of course a large industrial conglomerate with over a hundred year history that is heavily diversified in terms of industries, from appliances to "smart grid" infrastructure. The primary sectors are Infrastructure, Energy, Healthcare, and Industrials. The Energy sector covers a range of products and services in power generation, transmission, distribution, and storage. Healthcare provides technological solutions in healthcare delivery, including medical imaging and therapy, lab diagnostics, and healthcare IT.
Industrials sector provides products, services, and technology platforms to many different areas for industrial enterprises. The Infrastructure is a hybrid of the previous three sectors and is aimed at emerging markets in order to provide solutions for the rapid mass urbanization that is taking place throughout the developing world. Services include transportation, logistics and energy efficiency technologies. Furthermore there is a Financials sector to provide financing to customers. Uncertainty in Europe aside, Siemens' global footprint is demonstrated by their sources of revenue. (On Page 84 of their 2011 Annual Report)
Step by step Siemens is moving towards more of a "services" orientation, where they provide integrated solutions of many types, rather than simply being a manufacturer of industrial goods, with the goal of moving up the value chain and increasing profitability. From their annual report:
We intend to concentrate on innovation and technology-driven markets...for example, by providing intelligent and sustainable infrastructure solutions for the world's cities. (p. 56)
Their focus on services is also elaborated:
A second focus area is to expand our service business, which is highly diversified and broadly distributed throughout our Company. We believe that the large installed base of our products and solutions at our clients provides promising growth opportunities for our service business. Services play a key role in profitability at Siemens and, in addition, long-term service agreements are less likely to be impacted by economic fluctuations. (p. 57)
Overall the goal is to move up the value chain, focusing on providing technological solutions to many of the world's most pressing problems. In that regard, I believe it has a lot of similarity with IBM, which also has moved in a very similar direction, albeit focusing on providing software solutions. Being a diversified industrials firm, they do not depend on the talents of a small number of key managers (like Apple) nor are they subject to the whims of rapidly changing technology - like Research In Motion (RIMM).
Rather they are an institution that has "fingers in many pies," giving them substantial stability from their activities in many industries all over the globe. They are a respected brand name and an entrenched competitor in many of their markets which often have a lot of switching costs, as a result I believe they have a considerable economic moat. Their revenue is globally diversified with presence in Europe, North America, and Asia, as a result, their prospects are not necessarily hobbled by the EU financial crisis. Rather, as a result of European uncertainty, I believe it presents good opportunities for investors with a long term outlook.
Back of the envelope calculations on valuation: Instead of coming up with a specific valuation estimate using the various valuation techniques, I find it more useful to estimate the return that shareholders will see on their investment. Over the past four years they have generated on average 5.459 B EUR in FCFF, and they have about 30B in cash and investments and 17B in debt. If we look at the cash, net of debt, we get 13B euros. In dollars it comes out to be $7.15 B FCFF and $17.03 B in net cash equivalents (net cash equiv = Cash + LT investments - total debt).
Now considering the firm is trading at a market cap of $87 B, subtracting net cash/investments of 17.03 gives us a value of 70 Billion, compared to an FCF of 7.15B. That way the firm is trading at less than ten times free cash flow. As a result, it effectively gives the equity investor of an annualized return of greater than 10%, which is substantial and uncommon for a prominent large cap.
As this is a preliminary analysis of Siemens, any feedback or suggestions are greatly appreciated.