SEMHF - Siemens: Robust Q2 2023 Favorable Prospects

2023-05-30 06:33:00 ET

Summary

• Siemens reports strong Q2 2023 performance with increased orders, revenues, net income, and margins across multiple segments.
• The company is well-positioned to benefit from digital transformation, electrification, and sustainability trends in the global market.
• A prolonged economic recession is a risk.

German industrial giant Siemens ( SIEGY ) continues to deliver robust performance. A P/E of below 14 (lower than the sector median) for a leading player with favorable prospects suggests the stock is attractively priced. A prolonged or very severe recession is a risk.

Q2 2023: orders, revenues, net income, and margins up

Siemens reported a solid quarter in Q1 2023. Orders at EUR 23.6 billion grew 15% , driven by the highest quarterly order intake ever for Mobility, as well as strong order intake at Smart Infrastructure (up 9%). A solid book-to-bill of 1.22 helped push Siemens' order backlog higher again to a record EUR €105 billion which should support near-term performance.

On a comparable basis, revenues were up 15% YoY to EUR 19.4 billion and net profits nearly tripled to EUR 3.6 billion (helped by a EUR 1.6 billion tax-free gain from a reversal of an impairment of Siemens' stake in Siemens Energy AG). The profit margin for Siemens' Industrial Business (which covers four business segments namely Digital Industries, Smart Infrastructure, Mobility, and Siemens Healthineers) rose to 14.2% from 11% the same quarter a year earlier driven by expanding profit margins for three of Siemens' four Industrial Business segments; Digital Industries' profit margin rose to 23.5% from 18.1%, Smart Infrastructure's profit margin rose to 15.9% from 11.1%, and Mobility's profit margin rose to 9.2% from -17.3%. Siemens Healthineers' profit margin was down to 5.4% from 16%. The division saw lower overall profits as a result of revenue declines for its diagnostic business as well as charges related to the diagnostic business's transformation program, and other impairment charges owing to management's decision to refocus certain activities in the advanced therapies business.

Following strong performance for 1H FY 2023, Siemens management lifted guidance for the second time this year; revenue growth is projected at 9-11% (from 7-10%) previously. Digital Industries expects FY 2023 comparable revenue growth of 17-20% (from 12-15% previously) with a profit margin of 22.5-23.5%. Smart Infrastructure revenue growth is projected at 14-16% (from 9-12% previously) with a profit margin of 14.5-15.5%. Mobility expects revenue growth of 10-12% (up from 6-9% previously).

Medium term, Siemens is well positioned; the company is geographically well diversified (enabling them to capitalize on growth opportunities around the world) and all of the company's end markets are benefiting from secular growth trends.

Digital Industries' order intake was down 10% YoY on a comparable basis this quarter on difficult comps but revenues were up 23% YoY driven by significant contributions from the automation businesses. Quarterly profits reached the highest level ever helped by higher revenue and a favorable product mix.

Siemens' Digital Industries segment (which makes factory automation and process automation systems including motion control systems like drives, motors, and power supplies, as well as industrial software solutions such as Product Lifecycle Management software (such as Siemens NX and Teamcenter), electronic design automation software (such as Mentor), Industrial IoT platform Mindsphere, and low-code application development platform Mendix among others) is poised to benefit from digital transformation and automation investments worldwide. Consultancy firm IDC expects global digital transformation spending to reach USD 3.4 trillion in 2026, with a five-year compound annual growth rate ((CAGR)) of 16.3% "despite strong headwinds from global supply chain constraints, soaring inflation, political uncertainty, and an impending recession". Siemens's worldwide presence, domain expertise, and solid reputation as a longstanding industrial products and solutions provider position the company well to profit from the opportunity. Gartner recently named Siemens Digital Industries Software as a leader in the Gartner Magic Quadrant for Manufacturing Execution Systems ((MES)).

Siemens' strategic efforts to transition to a SaaS model are helping them capture digital transformation spend from SMBs , expanding their serviceable addressable market. Siemens management noted in their Q2 2023 earnings call that more than 75-80% of new customers are SMBs.

Siemens' Smart Infrastructure segment saw orders up 9% on a comparable basis driven by substantial growth in the electrification business which bagged a number of larger contracts from the data center, semiconductor, and power distribution customers. Quarterly profit was up 75% YoY to EUR 779 million, its highest level ever while segment margins rose to 15.9%, also its highest level ever helped by higher revenues, increased capacity utilization, a more favorable product mix, and cost efficiencies from their ongoing competitiveness program.

The segment which offers solutions to help transition from fossil fuels to renewable energy sources including such as HVAC controls, building management systems and software, fire safety products, grid management solutions and charging infrastructure among others is positioned to benefit from electrification and sustainability trends. Electrification around the world is still at a relatively early stage with the share of electricity in total energy consumption standing at around 20% in 2021. This share is projected to rise to 27% by 2030 and is expected to continue rising as the world advances towards Net Zero Emissions by 2050. Much of this increase could be met through electrification of transport, an opportunity for Siemens who has exposure to the space through its eMobility charging infrastructure business which has been active globally for over a decade . The EV charger market is expected to top EUR 300 billion by 2027 from EUR 66 billion this year, and market leader Siemens continues to bolster its position through organic efforts and acquisitions as well; last December the company announced plans to open its second US EV charger factory in Texas and recently acquired Indian EV infrastructure provider Mass-Tech Controls' EV division.

Mobility segment orders soared by triple digits on the back of large contract wins. Revenues were up 33% YoY on a comparable basis driven by sharply higher revenues from Siemens' rolling stock business.

Siemens' Mobility segment which offers passenger and freight transport solutions such as rolling stock, rail automation solutions, digital station solutions, and railway communication solutions among others is well placed to benefit from decarbonization efforts in the transport space which has one of the highest reliance on fossil fuels and accounts for a fifth of CO2 emissions. Whether diesel or electric-powered, railways generate lower emissions per passenger or per ton of goods than almost all modes of air or road transport, making rail a crucial solution to develop a sustainable transport system. Lacking the cost and scale advantages rivals CRRC ( CRCCY )) and Alstom-Bombardier ( ALSMY ) ( AOMFF ) possess, Siemens's strategy focuses on differentiation centered around technology offerings such as its Railigent digital railway platform which facilitates management of railway assets. Digital railway technologies is a multi-billion dollar industry and Siemens Mobility is a leader according to research firm MarketsandMarkets. Siemens Mobility has bagged a number of contracts lately including an order for 1,200 freight locomotives from Indian Railways (the single largest locomotive order in the history of Siemens Mobility), a EUR 900 million contract for a turnkey metro system for the Sydney Metro - Western Sydney Airport project in Australia, and EUR 310 million contract for signaling systems for the Singapore Land Transport Authority.

Siemens Healthineers (in which Siemens holds a 75% stake) ( SEMHF ) ( SMMNY ) had a relatively soft quarter with orders down 14% YoY, revenues down 3% YoY and segment profits down 67% YoY largely due to sharply lower demand for rapid coronavirus antigen tests in the diagnostics business. Impairments and charges related to transformation of the diagnostics business further contributed to the segment's profit decline.

The diagnostics business is expected to return to growth in 2H 2023 however and benefit from cost savings from its transformation program.

Risks

A major and prolonged economic recession could lead to slashed corporate budgets which could impact spending on digital transformation, and automation, impacting Siemens' Digital Industries business segment, one of its biggest by revenues and most profitable by margins (Digital Industries accounted for 27% of revenues in FY 2022, and had a profit margin of 20% that year).

Conclusion

Analysts are bullish on the stock.

With a forward P/E of 13.8 Siemens is trading lower than the sector median and could be considered attractively priced for a market-leading player with favorable prospects. Some may view the stock as a buy while others may view it as a hold.

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