Germany's Siemens (SIEGY 2.23%) is a lot more resilient than you might think. It has a mix of diversified revenue streams plus an increasing focus on end markets set for long-term growth. Its revenue streams are also internationally diversified, and the valuation remains compelling for a company in excellent shape. Here's why Siemens is an excellent stock to buy for investors looking further afield.
Introducing Siemens
In a nutshell, Siemens is a company of three owned businesses (digital industries, smart infrastructure, and mobility) alongside a 75% stake in Siemens Healthineers and a 17.1% stake in Siemens Energy.
The investment case for Siemens rests on the idea that its mobility business (rail rolling stock, rail infrastructure, and services) and Siemens Healthineers are relatively stable businesses with good growth prospects through the economic cycle. The other two owned businesses, digital industries (automation, motion control, and industrial software) and smart infrastructure (smart buildings, electrification, and electrical products) are leaders in exciting long-term growth markets with peers that trade on significantly higher-valuation multiples than those implied by Siemens' valuation.
Before getting into the valuation matters, here's a look at the relative importance of each business by looking at the profit to Siemens in 2023 and market estimates for 2023. You can see the profit improvement in mobility and Siemens Healthineers coming through to offset a decline in digital industries.
|
Profit |
2023 |
2024 Est |
Growth |
|---|---|---|---|
|
Digital Industries |
€4,833 million, or $5,185.87 million |
€4,428 million, or $4,751.33 million |
(8.4)% |
|
Smart Infrastructure |
€3,074 million, or $3,298.46 million |
€3,397 million, or $3,645.14 million |
10.5% |
|
Mobility |
€882 million, or $946.43 million |
€1,010 million, or $1,083.80 million |
14.5% |
|
Siemens Healthineers |
€2,527 million, or $2,711.65 million |
€3,427 million, or $3,677.39 million |
35.6% |
|
Total |
€11,316 million, or $12,143.17 million |
€12,261 million, or $13,157.24 million |
8.4% |
Data source: Siemens presentations. Dollar figures use current exchange rate.
Siemens' valuation discount
In common with its peer Rockwell Automation, management expects the digital-industries business to improve in the second half of 2024 on the assumption that customer destocking will have been largely completed by then. Both Rockwell and Siemens believe customers built up product inventory in the face of extended lead times, which need to be run down before new orders occur.
Despite the expected profit decline in 2024, the digital industry is an exciting business. Companies like Emerson Electric are pivoting toward the automation market. Meanwhile, Siemen's in-house industrial-software business is a leader in a growing market, competing with the likes of Dassault Systemes (a partner of automation company ABB) and PTC, Rockwell Automation's partner.Another automation competitor, Schneider Electric, bought UK industrial-software company AVEVA in 2023.
Now, here's a chart showing how Siemens's enterprise value (market cap plus net debt) to earnings before interest, taxation, depreciation, and amortization (EBITDA) multiple is notably lower than all of the competitors noted above.
WHR Days Inventory Outstanding (Quarterly) data by YCharts.
Smart infrastructure
This business benefits from the electrification-of-everything trend, which is driving demand for power, grid, and charging solutions. Moreover, advances in smart technology make it extremely cost-effective to invest in building control systems, not to mention the need to reduce carbon emissions from buildings. Moreover, Siemens's electrical products help keep buildings and communities with secure power.
In these markets, Siemens competes with ABB, Schneider Electric, Johnson Controls, and Honeywell's building technology business. Here again, note the valuation discount.
SIEGY EV to EBITDA data by YCharts.
Honeywell finds these markets attractive enough to buy Carrier's building-security business, Carrier Global Access Solutions.
A stock to buy
Furthermore, consider Siemens' 75% stake in Siemens Healthineers (a company with a €60 billion, or $64.38 billion market cap). Accepting that stake is worth €45 billion, or $48.29 billion means the rest of Siemens is worth €85 billion, or $91.21 billion. Siemens generated €10 billion, or $10.73 billion in free cash flow (FCF) in 2023, and stripping out the €2.2 billion, or $2.36 billion contribution from Siemens Healthineers leaves €7.8 billion. or $8.36 billion.
Image source: Getty Images.
In other words, Siemens without Siemens Healthineers is valued at less than 11 times FCF, which seems a very low valuation for a set of businesses in such attractive end markets.
The stock's discount hasn't gone unnoticed, with some investors arguing that Siemens should sell its stakes in Siemens Energy and Siemens Healthineers to reduce the complexity in the investment proposition and close the valuation gap with Schneider and others.
Those investors might be right because, whichever way you look at it, Siemens is undervalued.
