2017 earnings bridge indicates some downside to consensus, relative valuation still supportive
We turned more cautious on Siemens vs other large cap Electricals post the Q3
results this summer with the stock close to our TP and given the longer term
headwinds we discussed in our Power Generation report. In this note, we review
the drivers as the focus moves to 2017. Similar to ABB, Philips and Schneider, we
still see some relative valuation support given the substantial discount to high
quality defensive stocks and some of the Mechanical Engineers. However, Philips
has more upside and a better story for 2017, Schneider has more valuation upside
while we will assess ABB post the October 4 CMD (see separate note today).
Reviewing 2017 drivers: We believe that the relative investment story slows
vs 2016 when delivery on cost savings and FX resulted in superior relative
earnings development. Without specific earnings drivers for 2017, the focus
shifts more to top-line growth and portfolio, generally more difficult to bank on.
In the near term, 2017 consensus may drift vs stability at peers.
2017 earning bridge indicates downside to Bloomberg consensus: Siemens
is on track to increase underlying industrial profit by €700mn-800mn in 2016
on 3% organic sales growth, helped by €1bn contribution from overhead cost
savings, FX and M&A, which will not repeat in 2017 (at current perimeter and
FX rates). We expect similar 3% organic sales growth for 2017. To get to
consensus EPS of €7.3, assuming consensus uses similar “below the line” items
and charges/gains as we do, Siemens would have to increase underlying profits
by >€800mn compared to a moderate decline (implied) on similar sales growth
in 2016, excluding the specific drivers.
Earnings - no material changes: Our estimates remain largely unchanged. For
2016, we look for GAAP EPS of €6.8, slightly above the €6.5-6.7 guidance and
€6.7 consensus. For 2017, we look for flat reported EPS at €6.8 which
compares to consensus €7.3 (range of €6.8-8.1). Our model assumes no gains,
though some may materialize.
Valuation – still at a discount: The stock should remain supported by a
reasonable relative valuation. On our below consensus earnings, it still trades at
a 5% discount to the sector (MSCI Europe) and has not re-rated relative to its
European or global peers despite the better execution, indicating that investors
retain some skepticism regarding longer-term earnings and capital allocation.
Our Dec 2017 target price remains at €105.