This Company Has No Problem Growing Profits

Germany-based Siemens is exemplary

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Apr 27, 2017
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Germany-based Siemens AG (SIEGY, Financial)(XTER:SIE, Financial) reported 1.21% sales growth to 19.1 billion euros ($20.838 billion) and 24.8% profit growth to 1.9 billion euros in the first quarter a 10% profit margin compared to 8.1% in the year-earlier quarter.

In addition to a corresponding increase to operational expenses, Siemens AG added another 241 million euros in "other financial income" compared to $19 million losses a year ago.

Outlook

Siemens also raised earnings outlook for fiscal 2017.

According to reports, Siemens raised its previous expectation for the profit margin of Industrial Business in the range of 10.5% to 11.5% to the range of 11.0% to 12.0%. Further, the company raised the previous expectations for basic EPS from net income in the range of 6.80 euros to 7.20 euros to the range of 7.20 euros to 7.70 euros.

Nonetheless, Siemens AG ADR shares fell 2.9% a day after earnings and outlook announcement.

Valuations

Siemens ADR is currently undervalued in terms of earnings valuation compared to its peers. According to GuruFocus data, Siemens had a trailing price-earnings (P/E) ratio of 17.6 times vs. the industry median of 22.9 times, a price-book (P/B) value of 2.6 times vs. the industry median of 1.86 times and a price-sales (P/S) ratio of 1.3 times vs. 1.2 times.

Siemens also had a trailing dividend yield of 2.87% with 50% payout ratio.

Average fiscal 2017 sales and earnings-per-share expectations led to multiples of 1.28 times and 16.2 times.

Total returns

Seimens outperformed the broader Standard & Poor's 500 index so far this year with 13.2% total gains vs. the index’s 5.5%. However, the company’s ADR shares have lagged the broader index by 3% points in the past five years with the index’s 13.65%.

02May2017105425.jpg

(Earnings release)

Siemens AG

Siemens AG was founded on Oct. 12, 1847. According to filings, it is a technology company with core activities in the fields of electrification, automation and digitalization and activities in nearly all countries of the world.

In fiscal 2016, 73% of revenue was generated in the Europe, C.I.S., Africa and Middle East region, 18% in the Asia and Australia region and 9% in the Americas region.

Siemens has the following reportable segments: the Power and Gas; Wind Power and Renewables; Energy Management; Building Technologies; Mobility; Digital Factory; and Process Industries and Drives divisions. Siemens also operates Healthineers and Division Financial Services.

02May2017105425.jpg

(Annual report and earnings release)

Power and Gas

According to filings, the Power and Gas division offers a broad spectrum of products and solutions for generating electricity from fossil fuels and for producing and transporting oil and gas.

In the first quarter, Power and Gas division sales grew 5.8% to 3.9 billion euros – 19.8% (largest) of total Siemens sales excluding adjustments and reconciliations  while having delivered a profit margin of 11.8% vs. 9.5% in first-quarter 2016.

02May2017105426.jpg

(Annual report and earnings release)

Wind Power and Renewables

The Wind Power and Renewables division designs, manufactures and installs wind turbines for onshore and offshore applications.

In the first quarter, sales in the segment grew 15.6% to 1.4 billion euros or 7.1% unadjusted total company sales and delivered 8% profit margin vs. 4.3% in first-quarter 2016.

Siemens noted several things helped Wind Power achieve higher profitability. These are as follows: strong profitability driven by the revenue increase, higher productivity, positive effects related to project execution, higher capacity utilization and a larger contribution from the service business.

02May2017105426.jpg

(Annual report and earnings release)

Energy Management

The Energy Management division offers a wide spectrum of products, systems, solutions, software and services for transmitting and distributing power and for developing intelligent grid infrastructure.

In the first quarter, sales in the segment grew 1.6% to 2.8 billion euros – 14.3% of total unadjusted company sales and 6.7% profit margin vs. 6.6% in the year-earlier quarter.

02May2017105426.jpg

(Annual report and earnings release)

Building Technologies

The Building Technologies division is a leading provider of automation technologies and digital services for safe, secure and efficient buildings and infrastructures throughout their life cycles.

Further, the division offers products, solutions, services and software for fire safety, security, building automation, heating, ventilation, air conditioning and energy management.

In the first quarter, sales in Building Technologies grew 4.9% to 1.55 billion euros –Â 7.9% of total unadjusted sales –Â and delivered an 11% profit margin vs. 8.9% in first-quarter 2016.

02May2017105427.jpg

(Annual report and earnings release)

Mobility

The Mobility division combines all Siemens' businesses in the area of passenger and freight transportation, including rail vehicles, rail automation systems, rail electrification systems, road traffic technology, IT solutions and related services.

The division provides its customers with consulting, planning, financing, construction, service and operation of turnkey mobility systems.

In the first quarter, Mobility sales fell 11.9% to 1.8 billion euros – 9.2% of total unadjusted sales  and had a 9.1% profit margin vs. 9.4% in first-quarter 2016.

Seimens noted that the decline in Mobility sales was particularly in the rolling stock business due to timing factors related to the execution of large rail projects albeit the level of profitability of the segment was maintained.

02May2017105427.jpg

(Annual report and earnings release)

Digital Factory

The Digital Factory division offers a comprehensive product portfolio and system solutions used in manufacturing industries, complemented by life cycle and data-driven services.

In the first quarter, sales in the segment grew 3.9% to 2.56 billion euros – 13% of total unadjusted sales  and delivered an amazing 26% profit margin (highest) vs. 16.9% in first-quarter 2016.

According to filings, the segment included a noncash gain of 172 million euros related to the eCar business which the division contributed to a newly formed joint venture, Valeo Siemens eAutomotive. Without this bump, profit margin would still log higher at 19%.

02May2017105427.jpg

(Annual report and earnings release)

Process Industries and Drives

The Process Industries and Drives division offers a comprehensive product, software, solution and service portfolio for moving, measuring, controlling and optimizing all kinds of mass flows.

In the first quarter, sales in the segment fell by 3.9% to 2.12 billion euros 10.8% of total unadjusted sales  and had a 6.4% profit margin vs. 5.7% in first-quarter 2016.

Siemens stated that there is an ongoing weakness in commodity-related markets that continues to impact order and revenue development of the Process Industries and Drives division.

02May2017105428.jpg

(Annual report and earnings release)

Healthineers

The division is one of the world’s largest suppliers of technology to the health care industry and a leader in medical imaging and laboratory diagnostics. Healthineers provides medical technology and software solutions as well as clinical consulting services, supported by a complete set of training and service offerings.

In the first quarter, Healthineers recorded -0.2% sales decline to $3.28 billion – 16.7% of total unadjusted sales  and had an 18.9% profit margin vs. 16.5% in first-quarter 2016.

02May2017105428.jpg

(Annual report and earnings release)

Division Financial Services

Division Financial Services (SFS) supports its customers’ investments with leasing solutions and equipment, project and structured financing in the form of debt and equity investments.

In the first quarter, sales in the financial division fell 16.5% to 227 million euros – 1.2% of total unadjusted sales  and delivered a 61.7% (highest) profit margin vs. 61.8% in first-quarter 2016.

02May2017105428.jpg

(Morningstar data and earnings release)

Sales and net income

In the past three years, Siemens had three-year sales growth average of 1.63%, profit growth average of 8.4% and profit margin 7.98% (Morningstar data).

Cash, debt and book value

As of December, Siemens had 9.53 billion euros in cash and cash equivalents and 30.6 billion euros in debt with a debt-equity ratio of 0.78 times vs. 0.87 times the year-prior period.

Of Siemens’ $126.2 billion euros 26%Â were identified as blue-sky elements –Â goodwill and intangibles –Â having had a book value of $39.2 billion vs. $36.7 billion in December 2015.

Cash flow

02May2017105429.jpg

(Earnings release)

In first-quarter 2017, Siemens had 1.14 billion euros in cash flow from operations brought by higher cash inflow from dividends received, income tax expense, other noncash expense and lower cash out flow in relation to inventories.

02May2017105429.jpg

(Annual report and earnings release)

Capital expenditures were 421 million euros leaving Siemens with 714 million euros in free cash flow compared to 728 million euros in free cash (out)flow in first-quarter 2016. In addition, the company allocated 42 million euros in dividends to noncontrolling interests.

02May2017105429.jpg

(Annual report and earnings release)

Without any long-term debt issuance in the first quarter, Siemens also has been a net debt payer with $1.92 billion including interest paid.

Conclusion

Other than lower business growth observed in Siemen’s rail projects, financial services and the segment that is affected with overall commodity-related markets, the industrial company, delivered impressive profitability – if not increased it – as can be observed in the results in the recent quarter.

Siemens also carried a good amount of blue-sky elements in its albeit leveraged balance sheet. Further, the company also seemed to be focused on reducing its debt in recent years while bountifully rewarding its shareholders with buybacks and dividends.

02May2017105430.jpg

(Siemens ADR and price-sales ratio, GuruFocus)

A couple of analysts had an average price target of $79.75 per share –Â 18% upside from the price of $67.34 (at the time of writing). Meanwhile, using three-year earnings-per-share growth and P/E multiple average and applying a 30% margin would indicate a value of $79 per share, where 1 euro is to $1.07 exchange rate.

In summary, Siemens ADR shares are a speculative buy with $79 per share target price.

Disclosure: I do not have shares in any of the companies mentioned.

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