EUR 850.00 For Business Accounts Only

Morningstar | Stellar Order Growth as Siemens’ Digital Factory Success Story Continues in 3Q; Shares Fairly Valued

Siemens delivered mixed third-quarter results with stellar order growth of 16%, weak revenue, and robust operational margin expansion. The industrial business' profit margin increased in line with our expectation of 60 basis points year on year as strong improvements in digital factory, energy management, building technology, and process industries were more than offset by margin pressure in power and gas, mobility, healthcare, and renewable energy. Profit development, corrected for investment gains for the power and gas division, was weak in our view, with margins down 430 basis points, owing to lower production capacity utilisation and continued price pressure. The firm reported slightly disappointing revenue, down 4% year on year on a reported basis and flat on a comparable basis in the third quarter. This quarter's performance does not alter our narrow moat rating or our fair value estimate of EUR 128 per share for the local shares ($79 per share for the ADR). After a strong run in the share price since May, we see the shares as fairly valued.

We are happy with the performance of the digital factory and process industries and drives, or PD, divisions in the quarter. Top-line growth returned for PD (sales up 5% organically) and profit margins expanded 190 basis points despite currency headwinds. PD’s order intake growth was 11% organically, driven by increasing demand for automation solutions out of China. Strong demand for the high-margin product life cycle management software business, especially in the U.S., Germany, and China, boosted digital factory’s revenue (up 12% on organic basis) and profit margins (up 570 basis points).

Siemens’s new medium-term strategic plan, known as Vision 2020+, is in our view not revolutionary but more evolutionary. In line with previous actions, like the listing of the Healthineers division and mergers with publicly traded companies Gamesa and Alstom, Siemens will create a holding company with three operating companies. These will be stand-alone businesses with their own support functions and more entrepreneurial freedom in order to sharpen their focus on their respective markets. Management’s new guidance for industrial business profit margin expansion of 200 basis points over the medium term is slightly above our expectation (130 basis points of improvement over the next five years). We expect management’s focus on fixing underperforming businesses and cultivating operational excellence will further enhance operating margins. Siemens’ focus on portfolio optimatisation and cost reduction mitigates the impact of ongoing weakness in power-related markets.