Sunday, March 30, 2014

Siemens Chief Meets Putin in Russia- 04/09/2014

Topic company: Siemens


  1. Sources: Morningstar direct, Company 10Q, Seeking alpha

    Siemens is a diversified global manufacturer of industrial products, it derives revenue from 4 major segments
    (Reference items: 1Q14 rev 17.3 billion, net income 1.8 billion, FCF -438 millions)
    % of rev/NI
    Energy 33%/28%
    Industry 25%/28%
    Infrastructure 25%/18%
    Health care 18%/26%
    Orders increased 9% from prior-year period, but rev dropped 3% yoy. All sectors except infrastructure declined in revenue. Infrastructure sector drove total sectors profit performance in 2014.

    Economic Moat
    I think Siemens posses a narrow economic moat. The firm competes in industries that have structural advantages, high barriers protects Siemens's profits. Purchasers make decisions on features other than price since quality are crucial for capital goods. Hence, company the opportunity to charge a premium for technological innovation. Because the equipment is intended to last decades in many casesCustomers also concerned about a manufacturer's long-term viability because of maintenance needs. , While competition does exist in Siemens' markets, firms tend to focus more on technology innovation as opposed to price, thereby preserving industry margins. In short, customers are loyal but may have some bargaining power in choosing providers. Additionally, Siemens's faces little competition and pricing pressure so they should focus on product innovation and market expansion.

    Comparables are GE, ABB and PHG
    Siemens operating margin is 7%, 5% lower than industry average. P/E is 15%,lower than industry average of 17.2%.

    - High infrastructure expenses in emerging countries and developed will bolster Siemens's revenue. Siemens's strong infrastructure revenue was attributed to the massive subway contracts in Saudi Arabia.
    - Siemens is a market leader of offshore wind turbines and the only major company to offer deep-sea wind turbine solutions. Though wind power contributes only 23% of the energy sector revenue, green energy is the major theme moving forward. Siemens's wind power orders almost doubled from 1Q13 to 1Q14. (up 94%)

    - Company has competitive products, but its revenue growth and profits ratios are sub-par to comparables. Future success will be underlined by the management execution and good positioning in health markets.
    - Most segments are contracting: The health-care landscape is shifting toward cheaper and less sophisticated equipment, which threaten Siemens' technology advantages in the industry. The lower activity of oil rigs and lower demand for fossil energy also impacted Siemens's energy segment adversely.
    - Foreign exchange risks: global operations, financial reports stated in Euro.

    Hold. Siemens has sub-par performance than other competitors, but it is also trading at a lower multiple. The global economy recover induced higher spending of medical and infrastructure expenditures, creating room for Siemens's performance improvement.

  2. 2013 Annual Report
    Seeking Alpha
    Morning Star


    4 Business Segments (Revenue %, Operating Income %) Fiscal year 2013

    - Energy: 35%, 40%
    - Industry: 26%, 30.6%
    - Infrastructure & cities: 23%, 13.6%
    - Healthcare: 17%, 15.8%
    The company also provides technical maintenance, professional and consulting services, as well as financing services together with Siemens Financial Services

    CORE BUSINESS - Energy
    - Fossil Power Generation, Wind Power, Oil & Gas,Power Transmission
    - Energy reported a profit of € 1.955 billion in fiscal 2013, up 3% year-over-year
    - Primarily due to reducing its cost structure, adjusting capacity and improving its regional footprint.
    - Fossil Power Generation 16.5% margin

    - Energy: Energy and industrial companies
    - Healthcare: Healthcare equipment wholesaler, hospitals
    - Industry: Industrial business clients
    - Infrastructure & cities: Government and Agencies

    - Revenue: 3% growth in 2012, -2% decline in 2013
    - New orders in FY 12 fell 10%, to $98 billion
    - Order Backlog: € 100 million
    - Profitability: Net profit margin: 5.65%, peer average 10.2%
    - ROE: 14.25% in 2013, declining 4% (2012) industry average: 14.8%,
    - Financial Position: LT Debt/ Equity: 45.3%, declining 9%

    Free Cash Flow:
    - FCF in FY 2013 - 5.3 billion 13% increase from 2012
    - FCF/Rev: 6.6% in 2013, increase 1%
    - FCF/CFO: 72.8% in 2013, increase 6%
    Use of FCF
    - M&A expense: € 2.8 billion
    - Dividend: € 2.5 billion
    - Share repurchase: € 1.4 billion,
    - In 2013, Siemens acquired Invensys plc. U.K. (Invensys). Siemens acquired LMS International NV, Belgium
    - With the acquisition, Siemen expanded and complemented the Infrastructure & Cities Sector’s rail automation business;

    - Primary internation competitors are GE, 3M, ABB, United Technologies

    PRO (what is going right now)
    - Strong Performance in Emerging market: Siemens has managed to hold its ground in emerging markets
    - Siemens 2014 Strategy: In fiscal 2013, Siemens executed its Siemens 2014 program targeted at sustainable value creation. Through this program, the company aimed to raise its Total Sectors profit to at least 12% by fiscal 2014.
    - Cost cutting: Siemens reported increase in earnings due to this stringent cost-cutting strategy owing to which cost of sales drastically declined to 20% in Q1 2014. The company has greater selectivity in choosing contracts and cost-cutting efforts to offset some of the weakness in demand.

    CON (what may go wrong)
    - Soft end market demand: Many of Siemens' short-cycle businesses are struggling to make headway in the face of soft end-market demand, constraining profits.
    - Increasing Order backlog: Order backlog reached a record high of $138.8 billion at quarter end. While the significant backlog of orders is a positive, the current market uncertainties increase the possibility of cancellations.
    - New order fall behind other peers: New order trends have fallen behind those of diversified industrial peers such as GE in industry automation and power transmission, which raises concerns about market share losses and potentially negative revenue comparisons.

    - Experience narrow profit margin deleveraging across its businesses.

    - The company is exposed to currency and interest rate risks as well as to widening credit spreads.

  3. Sources:
    - 2013 10K
    - Seeking alpha
    - Zacks

    Business Overview: Siemens is a German multinational Engineering and Electronics Company, being among the world’s largest within its industry.

    It has four focused business sectors: (% of total revenue in FY 2013; % of profit in FY 2013)
    - Energy: 34%; 30%
    - Healthcare:18%;31%
    - Industry:24%;22%
    - Infrastructure & Cities:23%;5%

    Two additional reportable segments:
    - Siemens Financial Services & Equity Investment;6% of total profit respectively

    Core Business (largest segment Energy: % of segment revenue in FY 2013; profit margin in FY 2013)
    - Fossil Power Generation:38%; 17%
    - Solutions for the Oil and Gas Industry:19%;6%
    - Wind Power:19%;4.3%
    - Power Transmission & Distribution:23%; -4.6%

    -Principal customers in energy sector are large power utilities, independent power producers, and industrial companies, particularly in the oil and gas industry
    - Principal customers in healthcare sector are healthcare providers such as hospital groups and clinics
    - The other two sector’s principal customers are industrial customers

    Competitors for the major business units:
    - large competitors such as GE and Philips (PHG)
    - Industry-specific smaller companies like Alstom & ABB.

    Financial Overview:
    - FCF:
    • FCF as % of Rev: 7.21% in 2013; 6.09 in 2012, 7.61% in 2011, 9.23% in 2010
    • FCF as % of OCF: 75% in 2013, 68% in 2012, 72% in 2011, 75% in 2010
    • Use of FCF:
    o Return Capital to SH: Dividend payment: 49% & Share Repurchase:25%
    o Debt Repayment: 54% of FCF
    o Acquisition: 50% of FCF
    - Profitability: Operating Margin 0.07; industry 0.12; GE 0.12; ABB 0.11
    - Leverage ratio: 0.3X, lower than target of 0.5-1X, giving SI space for further leveraging

    What can go wrong?
    - Revenue:
    • Weak economic conditions in Europe, uncertainty in the healthcare market, and slow growth in China may affect its revenue growth
    • Exposure to currency risk and interest rate risk
    • Cancellation of a high record of order backlog
    - Expenses:
    • Cost cutting projects may not be implemented as planned or turn out to be less effective than expected

  4. --Segment:
    Energy: 34.3% of revenue, 40% of operating income
    Industry: 25.5%, 30.6%
    Infrastructure & cities: 22.7%, 13.6%
    Healthcare: 17.5%, 15.8%

    Energy: energy provider and industrial companies
    Healthcare: hospitals and doctors
    Industry: industrial customers, particularly those in the process and manufacturing industries.
    Infrastructure & cities: government institutions

    Revenue: 5.6% in 2012, -2% in 2013
    Industry and energy: both -4% in 2013
    industry rev declined, so does GE & ABB
    Operating income: -18.3% in 2012, -21.6% in 2013
    NI: -32.5% in 2012, 3.2% in 2013

    --ROE: 14.5% in 2013, industry avg: 15%, GE: 10%, Alstom: 10%, ABB: 16%
    Net profit margin: 5.65%
    (Healthcare: 15%, industry: 8%, energy: 7%, infrastructure & cities: 1.7%)

    --Market share:
    Power generation equipment: 13.4%, following GE 25.1%
    Transmission and distribution equipment: 3rd place with 9.1% share

    6.6% in 2013, 5.7% in 2012, 7.0% in 2011
    72.8% in 2013, 66.8% in 2012, 70.3% in 2011
    Use of FCF:
    Dividend: 51%, Share repurchase: 26%, Debt repayment: 59%, M&A expense: 56%,

    --What’s going right:
    Undergoing structure change to a simpler organization, higher efficient
    --What could go wrong:
    Euro/USD exchange rate risk
    Natural resources are depleting rapidly and use of non-renewable resources creating larger challenges for energy industry
    Decrease in demand for industrial goods.
    Rising cost of raw materials
    Cost saving program 2013-2014 targeting profit margin at 12% in 2014.

  5. Data sources: 10K; MorningStar; Seeking alpha
    Revenue breakdown
    • Energy: 34%, 40%
    • Industry: 26%, 31%
    • Healthcare: 18%, 16%
    • Infrastructure & cities: 23%, 14%
    Financial performance
    • -0.38% 5-year average revenue growth
    • -5.63% 5-year average net income growth
    • Days Inventory 103.56
    • Debt/Equity 0.66
    • Revenues of: Siemens, General Electric (GE), and ABB Group (ABB) are declining ; the rising cost of raw materials/the decrease in demand for industrial goods.
    Comments on segments
    • Siemens is the number-one provider of offshore wind turbines and the only major company to offer deep-sea wind turbine solutions.
    • Accounting for nearly 26% of revenue, Siemens Industry segment is combination of industry automation and drive technologies and is Siemens' sweet spot.
    • The infrastructure and cities segment's (a mix of transportation and logistics, power grid stations and products, building technologies). core revenue generating segment
    • reduction in research and development expenditure. The lack of innovation caused lesser healthcare orders for Siemens and resulted in a fall in the revenues
    Free cash flow
    • 2011 7.61% 72.05%
    • 2012 6.09% 68.36%
    • 2013 7.21% 74.54%
    Usage of free cash flow
    • Acquisition 52%
    • Intangibles 34%
    • Debt payment 53%
    • Stock repurchases 26%
    • Dividend 49%
    What could go wrong
    • Cheaper and less sophisticated equipment
    • Fail to get costs under control and return value to shareholders.
    • Foreign currency risks and political risks