In the maelstrom that is quarterly earnings season, nobody can follow everything. With that in mind, I'm coming back around to take a look at the German mega-conglomerate Siemens (SI). This is a frustrating stock in many respects; while the company beat estimates, they were lower estimates and although the stock looks just too cheap on a long-term basis, it's difficult to argue that investors should own this today instead of General Electric (GE) or ABB (ABB).
Jumping A Shorter Hurdle For Fiscal Q2
Siemens did well relative to expectations in the fiscal second quarter, but those were lowered expectations. That said, reported revenue growth of 9% and 7% organic is not a bad result - it was better than what ABB managed, and much better than Emerson (EMR) or Alstom.
Growth was led by Energy and Industry, up 10% and 8% respectively, on strength in renewables, oil/gas, and fossil power generation projects. Healthcare was decent; weak in absolute terms (up 5%), but fairly solid relative to other large diagnostics rivals like Abbott Labs (ABT) and Roche (OTCQX:RHHBY).
Profitability was less encouraging. The reported sector profit decline of 48% looked bad, but it's not as though the adjusted comparison of negative 5% was something to celebrate. A lot of the downside was due to project-specific weakness in transmission, but almost every single reportable category showed a year-on-year decrease in margins. With margin and cost control improvement being a central issue on this stock, this doesn't help.
Orders Have Gotten A Little Scary
Orders came in especially weak for the second quarter; dropping 16% on an organic basis and missing average expectations by around 2 billion euros (or 10%). There's a lot to chew on here.
Orders to China dropped 12%, and that was a fair bit better than ABB's performance, but the business mix is much different (Siemens has power gen and renewables business that ABB does not). Overall orders in power and automation looked iffy when compared to companies like GE, ABB, and Rockwell (ROK), so it's difficult to argue that Siemens is holding a strong hand right now.
There are a few mitigating factors. Siemens' comps were a little more challenging and the company did pull some sizable orders into the first quarter (though orders were weak then too). It's also worth noting that management has been focusing more on the profitability of its order book, so some of this decline could well be tied to eschewing business that didn't meet management's standards for margins and returns.
Still A Long-Term Story Worth Hearing
So, current business isn't great and the order book doesn't look strong. Why bother at all with Siemens?
Well, for starters, management seems to believe that the company is past the point of operating cost investment and should begin to reap the margin leverage later this year. At the same time, the company looks to end the fiscal year with more capital than it needs - raising the possibility of either significant cash returns to shareholders or additional bolt-on acquisitions.
At the same time, it looks like Siemens has gotten to a point where expectations are washed out and more leveraged to improvement than erosion. The company's Nokia Siemens Network venture with Nokia (NOK) also should be close to bottom, though the business's long-term competitiveness with Alcatel-Lucent (ALU) and Ericsson (ERIC) is very much an open question.
I also happen to believe that Siemens has footholds in markets with very worthwhile long-term fundamentals. Power gen, power transmission, renewable energy, factory automation, and diagnostics are all sizable global markets with above-average growth potential and Siemens is no worse than a #3 player in these markets.
The Bottom Line
I couldn't, and wouldn't, argue with someone who wanted to buy ABB or GE in favor of Siemens today. That said, don't ignore the value that is in these shares at today's price. Even if investors want to assume faster revenue growth at GE or better free cash flow conversion at ABB, respectively, Siemens shares are cheaper on a discounted cash flow basis.
In fact, assume just 2% compound free cash flow growth at Siemens and you can generate a price target for Siemens north of $115 per share. That's a startling amount of undervaluation for a company with a solid dividend and global leadership in multiple large markets. Siemens' performance today is problematic, but this is starting to look more and more like a global blue-chip that value investors ought to own.