Morningstar | Siemens' First Quarter Mixed, With Orders Looking Strong but Margins Surprising on the Downside
Narrow-moat Siemens had a mixed start to 2019 with good order book growth but disappointing margins due to revenue mix. The first quarter book-to-bill was 1.25, better than 1.13 a year ago. However, first-quarter group adjusted EBITA margin of 10.6% dropped by 80 basis points year over year, coming in shy of full-year guidance of 11%-12%. The drop came mainly from two divisions, power & gas and energy management, both exposed to tough end markets in power transmission and turbines. But broadly, the company outlook was moderately positive. Like other European capital goods suppliers, Siemens cited the automotive sector and China as two end markets where it is more cautious on orders for this year, but other industrial end markets are still looking stable. We did not see any significant shifts in first-quarter underlying trends relative to our forecasts (which include modest 2019 growth) to cause us to materially change our EUR 128 fair value estimate. Shares look attractively priced.The power & gas and energy management divisions posted margins at nearly half the prior-year levels. However, we expect power & gas margins to improve from first-quarter levels due to the order backlog. Orders were up 16% in the quarter and have been growing decently in the past couple of quarters. Revenue growth has yet to catch up, so operating leverage has been working against the margin. Order execution will lead to improved revenue growth. Roughly 80% of the backlog is from service contracts, whose recurring revenue should improve margin stability. On energy management, we believe revenue mix will make it more challenging, than for power & gas, to see a significant margin improvement much before the end of the year.
Digital factory posted a stable margin, nearly double that of the group, with modest order growth on a comparable basis. The division remains one of the most attractive in Siemens' portfolio from a long-term growth and profit standpoint.
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