Siemens Has Transformed Itself. The Stock Is Looking Attractive.
European industrial giant Siemens has made a lot of progress to simplify its operations. The transformation means the stock is looking attractive, and could gain at least 25% in the next year.
At first glance, Siemens (ticker: SIE.Germany) looks like a sprawling, global industrial enterprise of uncorrelated businesses with a large lending operation tacked on. That is, it feels a little like General Electric (GE), which has been hard to understand in recent years.
After years of spinoffs and asset sales, core-Siemens has become a global electrical engineering giant that benefits from secular trends including vehicle electrification, renewable-power generation, factory automation, and electricity-grid resiliency.
“Siemens is delivering on simplification, which our work suggests makes it a more attractive prospect,” RBC analyst Mark Fielding wrote in a recent research report. Fielding says investors ask him if the changes make Siemens a better company. His answer: Yes, “based on a smaller number of businesses with a more attractive margin and growth profile.”
Munich-based Siemens is targeting 5% to 7% annual sales growth between now and 2025, CEO Roland Busch said at the company’s capital-markets day in June. Busch took over from Josef Keser in February. The investor event was a chance to lay out his vision. He wants Siemens to generate high-margin, software-like sales while meeting higher growth targets.
Siemens’ transformation wasn’t easy or simple. There are several publicly traded stocks with the Siemens name, all of which have some connection to the parent, including Siemens Gamesa Renewable Energy (SGRE.Spain), Siemens Energy (ERN.Germany), and Siemens Healthineers (SHL.Germany)
Siemens Energy, which was spun out in September 2020, owns 67% of Siemens Gamesa. But Siemens still owns about 35% of Siemens Energy, which means Siemens shareholders own a portion of a power-generation franchise worth about $7 billion.
Siemens Healthineers sold shares in an initial public offering in 2018. Siemens still owns 75%, making its stake worth about $59 billion.
Siemens’ remaining engineering franchises are dubbed mobility, infrastructure, and digital industries. Taking into account the past three reported quarters and analysts’ fiscal fourth-quarter estimates, sales of those three groups should be almost $54 billion. Ebitda, or earnings before interest, taxes, depreciation, and amortization, should be about $8 billion. Over the first three quarters of Siemens’ fiscal year, sales in those three units are up almost 17% while Ebitda margins have improved about 1.7 percentage points.
The S&P 500 trades for about 15 times Ebitda. Using that, the engineering businesses could be worth about $120 billion.
Calculating Siemens’ debt and lending operations completes the sum-of-the-parts, or SOTP, valuation. The lending operation can generate about $600 million in earnings annually, which is worth about $9 billion. Siemens reported about $19 billion in industrial debt, which is not connected with its lending operations.
Adding it all up, Siemens stock is worth about $175 billion or about $207 a share, up some 25% from recent levels.
That’s Barron’s math. Others on Wall Street have made similar calculations. Goldman Sachs analyst Daniela Costa puts the SOTP valuation at about $250 a share, though her price target is $205. J.P. Morgan’s Andreas Willi wrote recently that Siemens was trading at a 30% discount to his SOTP valuation, implying a value of about $210 a share. Costa, Willi, and Fielding all rate shares a Buy.
If that trio of bulls is right, Siemens stock could gain 25% to 35% in the next year.