SMAWF - Siemens: Favorable Growth Tailwinds May Push The Stock Even Higher

2023-07-07 05:48:05 ET

Summary

• I continue to be bullish on the German industrial manufacturing/technology conglomerate, as I see a continued favorable exposure to secular growth drivers in AI, automation, and electrification.
• Siemens reported a strong quarter in FY Q2, beating analyst consensus expectations with regard to both revenue and earnings; moreover, the group raised 2023 guidance.
• Reflecting on a strong Q1, paired with a 2023 guidance raise, I now expect Siemens to capture a ~8-10% topline CAGR through 2027, likely resulting in a 7.5% annual earnings.

Almost a year passed since I have last covered Siemens (SIEGY) stock. And after a ?50% price appreciation, paired with a strong start into 2023 YTD, I think it is time to revisit the SIEGY investment thesis.

Overall, I continue to like Siemens as a leading industrial manufacturing/ technology conglomerate, with favorable exposure to secular growth drivers including automation, electrification and artificial intelligence. In my opinion, Siemens may enjoy a ~8-10% topline CAGR through 2027, likely resulting in a 7.5% annual earnings yield based on a cyclical adjusted 12-15% EBIT margin.

Note: For the purpose of this article, I reference the SIE.DE Xetra listing, which is the most liquid equity paper for Siemens stock. The core takeaway, however, and percentage upside/ downside estimates remain consistent across listings

Strong Q2 Report & Outlook Raised

Following a strong FY Q1, Siemens reported another strong quarter in FY Q2, beating analyst consensus expectations with regard to both revenue and earnings. During the period from January to end of March, the German industrial conglomerate generated total revenues of €19.4 billion, up about 15% YoY, and topping analyst consensus at midpoint by approximately ?€800 million /data collected by Refinitv).

With regard to profitability, Siemens's operating income expanded by 72% YoY, to €3.6 billion; core earnings per share increased 88% YoY, to €4.39. Now, investors should consider that these growth and profitability levels are quite phenomenal for an industrial global conglomerate, considering the stressed macro environment, especially in the group's home country Germany.

Siemens closed FY Q2 with about ?€40.1 billion of net debt, as compared to a TTM operating cash flow equal to ?€10.1 billion.

On the backdrop of a strong Q2 reporting, paired with favorable demand for all of the group's operating segments, including digital industries, smart infrastructure and mobility, Siemens raised the group's FY 2023 guidance: As compared to FY 2022, revenue growth is now expected to fall between 9-11% YoY (1-2 percentage points higher than the previous range); EPS are now projected to fall somewhere between €9.6-9.9, up from €8.9-9.4 estimated previously.

Favorable Demand Tailwinds Persist

According to management, Siemens' addressable market in industrial manufacturing is projected to grow at a 7% CAGR through 2027. However, the management also pointed out that opportunities with digital solutions, are seen growing at 11%+ CAGR.

Notably, Siemens' strategic focus increasingly skews towards new-generation technology trends relating to artificial intelligence and the industrial metaverse (digital solutions with 11%+ CAGR), where Siemens has taken global leadership in areas like digital twins and simulation, aided by software partnerships with industry giants Microsoft and NVIDIA.

In context of capturing growth, Siemens recently made an announcement stating that the company has committed €2 billion for enhancing factory capacity and establishing innovation labs. In that context the following key initiatives stand out:

1. Siemens plans to establish a €200 million new high-tech automation and digitalization factory in Singapore, positioning to cater to the fast-growing South East Asian market, which includes countries like Indonesia, Vietnam, Malaysia, Thailand, and India.

2. Siemens will invest €140 million in expanding the capacity of its existing automation factory in Chengdu by 40%.

3. Siemens is setting up an R&D innovation center in Shenzhen to accelerate the development of motion control systems, digitalization, and power electronics technologies.

4. Siemens announced the establishment of a new $220 million rolling stock factory in North Carolina, USA, in response to the growing demand for passenger rail services in the country.

5. Siemens is also pushing smaller investments in Europe for expanding its capacity, including in the Czech Republic and Frankfurt.

6. Siemens projected an additional €0.5 billion in research and development expenditure for fiscal year 2023, specifically dedicated towards bolstering pivotal technologies such as metaverse simulation, digital twins, artificial intelligence, and power electronics.

A Note On Growth & Earnings

Reflecting on escalating demand tailwinds for automation, electrification, and sustainable mobility, I argue that Siemens may reasonably capture a ~8-10% topline CAGR through 2027. With that frame of reference, if investors assume that the industry expansion translates about 1:1 in topline expansion for Siemens, then the company's 2027 revenue may fall in the range ~€106-114 billion. And extrapolating a 12-15% cyclically adjusted EBIT margin to 2027 topline, I calculate SIEGY's FWD 2027 EBIT at about ~€13-16 billion.

Now, if we discount the estimated FWD 2027 EBIT at 6%, then we can calculate Siemens' implied FWD EV/EBIT (FY27) at about x14, which I consider somewhat low for a quality company such as Siemens - remember, the inverse of the EV/EBIT multiple is approximately the estimated earnings yield: ~7.5%.

Update TP: Raise to €186

Reflecting on Siemens's strong Q2 2023 reporting and guidance update, I update my EPS expectations for Siemens through 2025: I now estimate that Siemens's EPS in 2023 will likely fall somewhere between €11 - €11.3. Moreover, I also adjust my EPS expectations for 2024 and 2025, to €12.3 and €13.4, respectively -- approximately in line with analyst consensus projections.

I continue to anchor on a 3.5% terminal growth rate (about one percentage point above estimated nominal global GDP growth), and I raise my cost of equity assumption by 75 basis points, to 9.25%, highlighting richer equity risk premia across the globe on the backdrop of higher interest rates.

Given the EPS upgrades as highlighted below, I now calculate a fair implied share price for the SIE.DE listing equal to €186.

Below is also the updated sensitivity table.

Conclusion

Despite a 50% price appreciation since my last coverage of Siemens stock, I continue to be bullish on the German industrial manufacturing/ technology conglomerate, as I see a continued favorable exposure to secular growth drivers including automation, electrification and artificial intelligence.

Reflecting on a strong Q2, paired with a 2023 guidance raise, I now expect Siemens to capture a ~8-10% topline CAGR through 2027, likely resulting in a 7.5% annual earnings yield based on a cyclical adjusted 12-15% EBIT margin. That said, I update my valuation framework for Siemens stock; And I now calculate a fair implied share price of €186, seeing close to 30% upside.

For reference, Siemens stock has outperformed the broad market since early 2023 - YTD, SIEGY stock is up about 20% YTD, versus a gain of close to 16% for the S&P 500 ( SP500 ).

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