Siemens clan: Which Siemens share belongs in the depot

by Stephan Bauer, Euro on Sunday

Es it happens in the best of families that a sprout will bud from the species. Siemens Energy, the youngest member of the group’s DAX club, was right off the mark. The energy engineer, who has been listed since autumn 2020, made no fewer than three mistakes in the forecasts in his still fresh stock market career. After the last profit warning a few days ago, the course fell by more than 20 percent within a short time. Shareholders, including the mother, who still holds 35 percent, lost a total of around three billion euros.

The energy company started as a high flyer. It was quickly promoted to the leading index, and after the spin-off the price rose by more than 60 percent at its peak. But since then it has been steadily downhill. Those shareholders who were there from the start are now sitting on a loss of around ten percent.

One could almost feel sorry for the still young Siemens Energy, SE for short, and its boss Christian Bruch. Because all profit warnings were attributed to a Spanish subsidiary, the wind turbine manufacturer Siemens Gamesa Renewable Energy. SE holds the majority of the shares in Gamesa. Not least because of Spanish stock corporation law, SE still does not have the subsidiary under control. The recent blunder was particularly bitter for investors. Because in the quarter from October to December, SE produced a big minus of 240 million euros instead of a profit as in the previous year. The youngster received just such a reprimand from the head of the family. “We are not satisfied with the operational performance,” said Siemens boss Roland Busch clearly tense. Professional investors can only wonder after the youngest buck of the company growth. “Three profit warnings in a row, that just can’t be,” says Vera Diehl, fund manager at Union Investment.

The bad news from the wind power company based in Zamudio in the Basque Country always sounds the same: there are technical problems, currently with a wind turbine for use on land, there are problems with project management, and recently there have been exorbitantly increasing material and logistics costs.

And then there’s the tiresome issue of penetration. Although SE holds two-thirds of Gamesa’s shares, the rest are listed on the Madrid stock exchange. In the controlling body, free shareholders are almost always at the table, which makes the matter so difficult. SE boss Christian Bruch is now, with Busch’s consent, sending a reorganizer to the top of Gamesa. Jochen Eickholt is the name of the new manager, who has already brought the Mobility traffic technology division into shape.

At full speed

In contrast to the offspring, the mother is currently spinning at full speed. The Siemens price shot up by up to eight percent after the surge in profits in the Christmas quarter. The people of Munich are experiencing a rush of customers desperately buying material and software solutions for digitization. Incoming orders in the group jumped by 50 percent. Siemens now has 93 billion euros in orders on its books, compared to around 70 billion in the previous year. In the Digital Industries (DI) division, which provides automation technology and software for industrial customers, incoming orders climbed by a whopping 70 percent.

The DI programs for the development, planning and control of production are not only popular with established customers, for example from the steel and automotive industries or mechanical engineering. Semiconductor manufacturers, electronics producers and battery manufacturers also use the technology that Siemens itself uses in production sites such as Amberg in Bavaria. “Our customers are investing in digitization. We are using our opportunity to gain market share,” says CEO Busch.

Added to this is the special situation of the pandemic, in which the global logistics chains are extremely tense. Many customers order in stock so that they always have enough parts. Siemens DI, which is the largest in terms of sales and also the most profitable with an operating margin of around 22 percent, even registered growth of almost 80 percent in its important Chinese market. The management sees no danger of customers ordering on suspicion and then canceling again. “The receipts are valid. In Asian markets, the down payment rates are even increasing,” says CFO Ralf Thomas.

Despite the brilliant figures, Siemens itself is affected by the global restrictions on the supply of parts. “We notice bottlenecks, especially with electronic components,” explains Busch. That’s why, according to the boss, you can’t deliver the orders of many customers on time – his biggest construction site at the moment. And a manageable topic in view of a corporate history that was teeming with costly complications for a long time – the late delivery of ICEs to Deutsche Bahn almost ten years ago is just one example. The financial market expects Busch to process the order backlog as efficiently as possible so as not to alienate customers. “The optimal order processing must now have top priority,” says fund manager Diehl.

Sales drive profit

In the euphoria about the good figures of the DAX group – sales increased by a good nine percent, the operating group margin rose to 16 percent – one detail was almost forgotten. The profitability of the cream of the crop DI fell to 21.8 percent. The reason is the conversion of the software business to subscription sales, the so-called “Software as a Service” or SaaS model. In favor of recurring sales, which also stabilize the cash flow, DI foregoes the advantage of upfront payments in the license model. The switch is likely to dampen DI’s margins for longer.

The other two Siemens areas are picking up speed. The Smart Infrastructure (SI) division is registering strong demand for energy-saving technology, for example for data centers, and many companies are also investing in consulting for a better CO2 balance. Verkehrstechnik received a major order for ICE trains worth EUR 1.5 billion and is making an after-tax profit of EUR 600 to 800 million in the current financial year simply from the sale of the Yunex road transport technology division. Also because of the inflows from sales, CFO Thomas has the prospect of possibly raising the annual forecast for earnings per share.

The medical technology subsidiary Siemens Healthineers has already raised its annual targets. The people from Erlangen want to increase sales by three to five percent instead of two. That sounds modest considering the mother’s growth. But the basis of comparison is high. Due to the rapid sales of corona tests, Healthineers had already increased by 20 percent in the past financial year and set a sales record.

The medical technician, in which Siemens still holds 75 percent of the shares, is the secret nerd in the Siemens crew. Since the end of September 2020, the share has been up almost 50 percent. This is also due to a strong idea and the determination of the team around boss Bernd Montag. In the Corona spring of 2020, Healthineers launched a rapid corona test with a partner in China. That worked. In the last financial year alone, the Erlangen-based company flew more than 70 planes full to the brim with rapid tests from China to Germany. Business continues to go well, the higher forecast is also a consequence of this.

In addition to innovations such as the world’s first photon-counting computer tomograph (CT), which provides sharper images with less radiation, Healthineers, the world’s number 1 in imaging devices, offer high reliability in the results – in contrast to SE. One reason for this is the strong service business. Materials and the professional maintenance of the CTs and diagnostic devices, but also advice for large hospital chains that are in the middle of digitization are in demand.

Investors also like Healthineers because of their long-term growth opportunities. When it comes to cancer therapies, for example, the Franconians have been at the forefront worldwide since the takeover of the US group Varian, it is one of the fastest growing segments of the healthcare industry. The $16 billion deal was initially considered too expensive. But thanks to Varian, the group portfolio offers the entire spectrum from diagnosis to therapy, which is a plus for customers. Montag’s ambitious goals, according to which profits should now increase by twelve to 15 percent per year from 2023 to 2025 instead of ten percent per year, are convincing on the financial market.

The Siemens share has also become more attractive since the spin-off of the energy sector in autumn 2020 – and has delivered a price gain of around 30 percent. This means that investors who were involved in the SE spin-off are in the plus despite the price losses – and still earned significantly better than with the DAX. Ex-Siemens boss Joe Kaeser, who hatched the plan to detach the core business from the rest of the digitization divisions, however, had a fundamental revaluation of the share in mind. So far, this has only worked to a limited extent. “We are on the way to a revaluation,” says fund manager Vera Diehl.

A lot of work for Kaeser

For the time being, Kaeser himself has a lot to do as head of the supervisory board of the ailing Siemens Energy. For the current financial year up to the end of September, the only thing left to do is to minimize the announced losses. The operating margin of 6.5 to 8.5 percent targeted for 2023 is also under scrutiny due to the Gamesa malaise. Hopes now rest on the experienced renovator Eickholt, whom Busch praises for his firefighting work in traffic engineering. In the long term, however, a complete takeover will probably have to take place in order to take action.

Despite this weakness and the disappointments, investor confidence in the SE appears to be battered but not shattered. “It will take a while before they can do it. But they will ultimately do it, also because of Mr. Kaeser’s ambition,” says fund manager Diehl. Sometimes offspring that have been thrown out of the way still find the right way.

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