It's usually a good idea to take a look at what a company's rivals are reporting to gauge trends in the end markets they have in common. Unfortunately, in the case of Siemens (SIEGY +1.36%), the implications for competitors like Rockwell Automation (ROK 1.89%), General Electric, ABB (ABB +0.85%), and Emerson Electric (EMR 0.77%) aren't great. Let's take a look at what the company's recent third-quarter earnings report means for the industrial sector.
Siemens' difficult third quarter
The big news was the sales and orders decline in the digital industries segment.
Siemens is hoping the use of digital technology will help drive industrial automation sales. Image source: Getty Images.
It's meaningful to Siemens because the segment is its largest solely owned profit center, and the company has been relying on it to offset weakness in the gas and power segment. There's little Siemens can do about the gas and power segment because the heavy-duty gas turbine equipment end market has halved in the last five years. (GE has been particularly hard-hit.)
| Siemens Segment |
Q3 Sales Growth |
Q3 EBITA (in euros) |
Q3 EBITA Margin |
Orders Growth |
Siemens Competitors |
|---|---|---|---|---|---|
|
Digital Industries |
(2%) |
556 million |
14.3% |
(5%) |
Dassault Systemes, Rockwell Automation, Schneider, Emerson Electric, ABB |
|
Smart Infrastructure |
2% |
351 million |
9.4% |
2% |
Schneider, ABB, Johnson Controls, Honeywell |
|
Gas and Power |
(5%) |
156 million |
3.6% |
(15%) |
GE, Mitsubishi |
|
Mobility |
(2%) |
220 million |
10.4% |
18% |
Alstom, Bombardier |
|
Siemens Healthineers* |
6% |
543 million |
15.2% |
13% |
GE, Philips, Roche, Abbott |
|
Siemens Gamesa Renewable Energy** |
24% |
109 million |
4.1% |
42% |
GE, Vestas |
|
Total Industrial |
2% |
1.935 billion |
9.60% |
7% |
N/A |
Data source: Siemens presentations. Comparable year-over-year growth figures. EBITA = earnings before interest, taxes, and amortization. *Publicly listed company of which Siemens owns 85% of shares. **Publicly listed company of which Siemens owns 59% of shares.
What Siemens said about digital industries
Siemens' digital industries business includes discrete automation (factory automation and motion control, where it competes heavily with Rockwell and also ABB), process automation (Emerson and Schneider are big players), and the industrial software to manage automation assets (Dassault and Rockwell's partner PTC are competitors).
In common with what Rockwell said about its third quarter, Siemens saw a drop-off in demand beginning in June (the third quarter ran from April through June), with digital industries CEO Klaus Helmrich noting, "[W]e operate in a very challenging market environment for our short-cycle business without further deterioration, particularly in our core end markets like automotive and machine-building industries during the quarter."
Indeed, Helmrich believes the automotive, machine tools, and pharma and chemicals end markets are poised for a decline within the next three to four quarters, while he expects the food and beverage and electronics and semiconductors areas will grow. He went on to add that "orders in software and process automation were up with decent growth rates."
In a nutshell, Siemens saw a slowing in discrete automation, alongside ongoing growth in process automation, albeit with some signs of slowing in certain industries like pharma and chemicals.
What it all means
Frankly, it's hard to know what to make of some of this. It's true that Siemens' overall commentary on weakening trends in discrete automation is mirrored by Rockwell, Schneider, and Emerson Electric, but the German company's outlook for two of its specific end markets can be called into question. For example, Rockwell cited semiconductors and food and beverage as being weak sectors, and Emerson Electric CEO David Farr made similar remarks.
However, all the automation companies agree that some of the process automation industries (specifically in oil and gas, mining, and pulp and paper) and life sciences businesses have been relatively stronger. That means process-automation-heavy Emerson Electric and Schneider will do relatively better; ABB also cited strength in heavy industries.
The key question is, can it continue? It's a good question -- Emerson Electric's Farr talked of a growing number of orders being pushed out even in process automation. Moreover, because oil and gas, pulp and paper, and mining are traditionally cyclical industries, if the overall economic growth outlook falters, it's likely that capital spending plans in those industries will also come under scrutiny.
In other words, the argument that a slowdown in the economy (seen in the discrete automation spending figures/outlooks) won't feed through into weakness in process automation isn't that strong. At least, it's not strong enough to justify buying stocks in the sector solely on this basis.
The key takeaway for Siemens and other investors
Siemens management maintained its full-year guidance, and its 4%-plus yield continues to make the stock a favored one among those who like dividend investing.
On the other hand, Siemens has only one quarter left in its fiscal 2019, and the full-year earnings-per-share guidance range is wide (6.30 euros to 7 euros), so investors shouldn't read too much into its outlook. Indeed, management noted, "The favorable market environment for our short-cycle businesses, which was a material basis for our outlook, has significantly deteriorated in the second half of the fiscal year."
In addition, investors can't rely on growth in process automation in order to offset weakness in discrete automation. Until there's clear evidence of stabilization in short-cycle end demand in discrete automation then there will be a cloud over Siemens's earnings outlook. In other words, investors in Siemens and its competitors can expect a tough environment in the coming quarters.
