It’s unusual to find a quality industrial trading at a reasonable valuation these days, so the very reasonable valuation on Siemens (OTCPK:SIEGY) has me puzzled. I don’t think my long-term revenue outlook for 4% growth is out of line relative to other quality automation, electrification, and healthcare plays like ABB (ABB), Eaton (ETN), Philips (PHG), and Schneider (OTCPK:SBGSY), and likewise, I don’t think an outlook for long-term FCF margins in the low-to-mid teens is that bullish relative to peers, particularly considering Siemens’ above-average leverage to software.
Operationally, I like a lot of what Siemens has been doing. Siemens was an early mover in the “de-conglomeritization” movement, and I think Siemens is stronger for having moved on from Osram and Siemens Energy while keeping a strong position in Siemens Healthineers (OTCPK:SMMNY). Although there are some areas where I think Siemens could upgrade its business (robotics, low-voltage, and building controls), I think Siemens is well-leveraged to a near-term recovery in industrial automation and a longer-term recovery in process automation, as well as longer-term trends like green electrification and mass transit.
A Rundown Of What Remains
With Siemens Energy now on its own (Siemens owns 35%, but will sell down the stake over time), Siemens is a more industrial-focused business than before, and that’s likely for the best. While Siemens Energy is good at what it does, power generation overall is not a growth market and growth opportunities in areas like wind, green hydrogen, and transmission, are offset by challenging conditions in the core generation business.
Now, Siemens is much more focused on industrial automation (Digital Industries), including software, electrification and building controls (Smart Infrastructure), and mass transit (Mobility).
Digital Industries includes a global leadership position in PLCs (basically a type of industrial computer that controls a range of manufacturing processes and components), a strong position in drives and related components, and a strong position in industrial software, including product lifecycle management (or PLM), system simulation, and electronic design. While the PLC and drives business competes with companies like Rockwell (ROK), Schneider, and ABB, the software side competes with a range of companies including Dassault (OTCPK:DASTY) and Hexagon (OTCPK:HXGBY).
While Siemens is also strong on the process automation side, they’re comparatively less strong here, with Emerson (EMR), ABB, and Schneider offering sharper competition. Siemens lacks the same strength in DCS (kinda-sorta like PLCs for process industries), and it also doesn’t have the leverage to “final control” products like valves that Emerson has. Likewise, Siemens is not really present in the robotics space to a meaningful extent.
In Smart Infrastructure, Siemens is a somewhat distant competitor to ABB, Eaton, and Schneider in many areas of the low/medium-voltage market, and margins haven’t historically been all that great. Siemens is also present in the building/HVAC controls space, where it competes with companies like Honeywell (HON) and Johnson Controls (JCI).
Mobility is a little more straightforward, with Siemens having a large position in rolling stock for mass transit, railway automation, and intelligent road infrastructure (intelligent traffic management and so on).
Last but not least is Siemens Healthineers, where Siemens intends to maintain a 72% shareholding after the Varian (VAR) acquisition. Siemens Healthineers is particularly focused on areas like imaging (where it competes with Philips, among others) and diagnostics (where it competes with Abbott (ABT), Danaher (DHR), and many others), and now oncology with the pending acquisition of Varian. Relative to companies like Abbott and Philips, Siemens Healthineers is more leveraged to capital equipment.
Leveraged To Automation And Growth
Across Siemens’ addressed markets, I believe the company is addressing a number of attractive opportunities with better than GDP growth prospects. I’ve written extensively about my long-term bullishness on industrial automation and electrification, as companies look to replace labor and improve operating efficiencies.
Electrification is also a significant trend in commercial buildings, as more and more activity shifts to automation products that can monitor a building in real-time and adjust functions like HVAC, lighting, and so on to minimize energy use without compromising people’s ability to work.
Mobility, too, plays on these themes. Municipalities are increasingly looking to digital automation products to help regulate traffic flow to both improve traffic jams and reduce emissions. Public transit, too, remains an important market as municipalities try to cope with ever-increasing urbanization and balance convenience/accessibility with environmental considerations.
While Healthineers isn’t leveraged to these trends (there is some automation in diagnostics, but not meaningfully so), it does leverage overall above-GDP growth in spending on healthcare around the world. Diagnostics continues to grow in response to growing test availability, while imaging and oncology are strong growth markets in emerging market medical systems like China.
The Outlook
Perhaps the reason Siemens looks a little undervalued is that there are definitely areas of the business that need work. While Siemens is a global leader in discrete automation, Rockwell and ABB have been upping their game. At the same time, the company isn’t as strong in process automation, and this could be an area of further future investment. The same could be true for the electrification business – while nVent (NVT) is often talked about as a potential target for ABB or Eaton, it would seem to me that Siemens could use inorganic investment to improve its business as well, and likewise with building controls/automation.
As I said in the open, I’m looking for Siemens to generate around 4% long-term core revenue growth. While there are some deficiencies in the business, there are also areas of real strength like discrete automation and industrial software that should continue to grow at above-market rates. Siemens should benefit from an upcoming investment cycle in industrial end-markets (automation and electrification), and combined with a multiyear cost reduction program, I see FCF margins heading to the low double-digits and then on closer to the teens over time, supporting a long-term FCF growth rate in the high mid-single-digits.
Discounting those cash flows back, I believe Siemens is priced for nearly a double-digit annualized total return for shareholders. The margin/return-driven EV/EBITDA approach doesn’t give me such a strong result, and that could explain some of the valuation today – Siemens’ margins, ROIC, and other metrics are not all that strong compared to many industrials.
The Bottom Line
This article is just a small piece of the story at Siemens, and I intend to go into more depth in future articles. So, at a minimum, consider this only a small part of your due diligence. Even so, I like the efforts Siemens management has made over the years to slim down to a more attractive core, while continuing to invest in areas like software. While Siemens has areas that need improvement, I do think the valuation is attractive enough to merit a much closer look today, particularly given an upcoming industrial recovery and a relatively clean balance sheet that will allow for future deals.
Disclosure:I am/we are long ABB.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.read more
A Slimmed-Down Siemens Looks Oddly Undervalued
