Slowdown in Germany: What Will Happen to These German ADRs?

What's the outlook for Deutsche Bank, Siemens, and Fresenius Medical Care?

Jan 17, 2014 at 4:35PM

According to Destatis, the official German statistics agency, Germany's GDP grew just 0.4% in 2013. This is the lowest growth rate since the 5.1% drop registered in 2009, during the global financial crisis. The German government also finished the year with a 0.1% deficit, versus a 0.1% surplus in 2012. So, although it remains stable, the country might start to revert trends and fall into recession. Given the circumstances, let's see how some German ADRs are performing.

Still unaffected
First, Fresenius Medical Care (NYSE:FMS) is the No. 1 global provider of dialysis equipment. It enjoys leading market share of almost 33% in its home country.

Fresenius continues to report good results despite the performance of the German economy. The first three quarters of 2013 showed a 9% growth in sales and a 12% increase in net income.

The combination of an aging global population and Fresenius' vertically integrated equipment division makes the company a competitive player in the health services industry. In fact, rising rates of obesity and diabetes can only raise demand for dialysis services going forward. So fundamentals are on the company's side.

Fresenius, which already has a broad geographic reach, continues to expand internationally to bolster its market share, economies of scale, and payer diversification. Globally, the dialysis market is extremely fragmented, opening opportunities through acquisition strategies.

One risk the company faces is its exposure to government-based reimbursements in the U.S. and abroad. In fact, Medicare and Medicaid account for 30% of the company's consolidated top line. These reimbursements could drop as a result of the adjustments under the Affordable Care Act.

A discouraging diagnosis
Second, here's a well-known global leader in most of its key businesses: Siemens AG (NASDAQOTH:SIEGY).

In this case, the company reported a lackluster fourth quarter, with a year-over-year decrease in both revenue and earnings. Revenue and orders dropped 1% to 21.2 billion euros and 21 billion euros, respectively.

Throughout 2013, the company executed its "Siemens 2014" program, aiming at raising its total-sectors profit to at least 12% by fiscal 2014. Nonetheless, its total-sectors profit declined to 1.6 billion euros, driven by charges from the same program.

If we consider the fundamentals, global macroeconomic and financing conditions are still reducing consumer spending, business confidence, and capital expenditures for Siemens. These symptoms are reflected in short-cycle industries such as automotive, manufacturing, and lighting, which accounted for 24.2% of revenue in fiscal 2013. The case for longer-cycle energy and infrastructure customers is not optimal, either, as the worst scenario would be the postponement or cancellation of potential new business. The energy and infrastructure segments together accounted for 58% of revenue in fiscal 2013, so it's no joke.

The impact of a slowdown in Germany, however, is still uncertain, as Siemens generates a significant portion of its revenue outside the country.

This isn't play money
Finally, here's German financial institution Deutsche Bank AG (NYSE:DB).

Third-quarter results were not encouraging for Deutsche Bank either. Although the adverse 1.2 billion euro litigation expenses were the main driver of the disappointing results, overall undisciplined expense-management was reflected, along with a deteriorating top line. As a result, net income was only 51 million euros, which is not much for a huge bank like this one.

Deutsche Bank's strategy is to build its capital level, and in fact, its capital position for the quarter remains strong, showing a common-equity tier 1 capital ratio of 13%, up from 11.4% at the end of 2012.

Despite the revenue drop during the nine months ended last September, the bank holds a good revenue growth record. And considering that the bank's compound annual growth rate, or CAGR, from 2008 to 2012 is 19.9%, Deutsche Bank should get its growth back on track.

However, expenses also surged at a CAGR of 11.3% over the same period, elevating exposure to operational risks.

Final thoughts
Although local demand in Germany remains strong, it could not offset the persistent recession in some European countries and the slowdown of the global economy.

Fresenius operates in a market that is pretty resistant to variations in GDP. Plus, its global reach reduces its exposure to the German economy. Thus its growth outlook will depend primarily on its management's ability to expand overseas and control costs.

Siemens should perform in line with the broader market. However, it will be hard to expect a recovery of its short-cycle businesses until late in its fiscal year at least. It is a company very dependent on the evolution of the global economy.

Given the stressed operating environment, it will be hard to see significant improvements in earnings for Deutsche Bank in the upcoming quarters. The bank still has a fair amount of exposure to Germany, and because it's in a highly regulated industry with a narrow margin for innovation, a slowdown in the country will only compound the impact on the bank. Let's not forget that the financial institutions' prices are the first to adjust when markets make a correction.

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