SMAWF - Siemens: Investors Should Remain Bullish

• Siemens reported June quarter 2022 earnings on August 11 and has announced the first quarterly loss since more than a decade.
• Adjusting for non-recurring charges, Siemens has delivered a solid June quarter, growing revenues 11% year-over-year.
• The loss was driven by non-operating impairment charges associated with the company's engagement with Siemens Energy and the exit from Russia.
• After a solid quarterly performance, despite a highly challenging macro-economy, I am confident to reiterate my Siemens Buy recommendation.
• I slightly lower my Siemens target price by 10% to €155/share to reflect a slight EPS contraction and overall lower equity prices given higher interest rates and risk premia.

Thesis

Siemens Aktiengesellschaft ( SIEGY , SMAWF ) reported June quarter 2022 earnings on August 12 and announced its first quarterly loss for more than a decade. But investors should not focus on the net-loss headline number, which was driven by non-recurring and non-operating impairment charges related to Siemens Energy and the company's Russia-Exit. Adjusting for non-recurring charges, Siemens delivered a solid June quarter, growing revenues 11% year over year-despite what has arguably been a very bad macro-environment for the German industrial powerhouse. Accordingly, I am confident to reiterate my Buy recommendation. However, I slightly lower my target price by 10% to €155/share to reflect a slight EPS contraction and overall lower equity prices given higher interest rates and risk premia.

For reference, Siemens shares have lost about 33.7% YTD, versus a loss of about 13.5% for Germany's leading stock index the DAX 40.

Siemens's June Quarter

During the period from April to end of June, Siemens generated total revenues of €17.9 billion, which is a 11% year over year growth and 4% excluding currency effects. The company generated an operating profit of €2.8 billion, but a net-loss of about €1.5 billion, or €1.85/share. The loss, however, was driven by non-operating (and arguably non-recurring) impairment charges: a €2.7 billion write-down associated to the company's engagement with Siemens Energy and a €400 million write-down as the company exited Russia. Free cash flow was €2.3 billion.

Roland Busch, Siemens CEO commented that:

We captured significant opportunities in a market environment with ongoing high demand. Our strong top line momentum continued, with a comparable order growth of 20 percent since the beginning of fiscal 2022.

He further added that

(the company) had the right offerings and the right strategy to be successful even in uncertain times.

Moreover, he added that management has experienced and continues to see little adverse impact from the current gas crisis in Germany.

Strong Guidance

In addition to the solid June quarter, Siemens gave a strong guidance for the rest of the year. First and most notably, the company said that the company's order backlog has now grown to a "high-quality and high-quantity: €99 billion. For the FY, Siemens Group expects between 6% to 8% topline growth with healthy support from all segments: For Digital Industries Siemens expects about triple the global nominal GDP growth between 9% to 12% and profit margin between 19% to 21%; For Smart Infrastructure the company sees 6% to 9% revenue growth and profit margins of 12% to 13%; Mobility is expected to lag-with flat topline performance as compared to the prior FY and slightly lower profit margins of 7.5% to 8.5% (versus 10% to 10.5%). Siemens said that adjusting for the €2.7 billion non-cash impairment for Siemens Energy, EPS outlook remains as previously communicated between €8.70 to €9.10.

Implications for Investors

About 3 months ago, I pointed out that Siemens stock is trading cheap relative to fundamentals. The company's June quarter has not changed this thesis and thus I continue to support a bullish recommendation. What Q2 has indicated, however, is that buying Siemens undervaluation is much less risky than the market implies. As Siemens managed to record a 12% year over year growth, despite what has arguably been a very challenging economic backdrop, I argue that Siemen's market and high quality business model is surprisingly resilient. Accordingly, investors should not miss this secular buying opportunity simply based on fears of a recession-and other macro-headwinds such as geopolitical tensions and hawkish central policy decisions.

Siemens is trading at very attractive valuation metrics. Notably, the company's one-year forward P/E is 12.3 . These metrics imply that investors consider Siemens a value stock, if not a value trap. But arguably, a company given broad exposure to secular trends such as automation, digitalization and decarbonization, should enable Siemens stock to trade at a growth multiple. And, in my opinion, Siemens stock will re-price accordingly once the lagging market sentiment catches up with the company's business potential and fundamentals.

Recommendation

Siemens is one of my favorite European GARP stocks. The company is down more than 30% YTD, although the company has yet to show weakness in relation to macro-economic headwinds. Moreover, on a long-term horizon, Siemens is excellently positioned to benefit from secular growth trends. Accordingly, I am confident to reiterate my Buy recommendation.

My coverage initiation article on Siemens: Siemens: A Standout Amidst Macro-Economic Headwinds

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