German industrial giant and perennial General Electric rival Siemens (OTC:SIEGY) is often overlooked by U.S. investors -- but those who ignore it are missing out. In an increasingly expensive market, investing in Siemens -- U.S. investors can buy it through an American Depositary Receipt -- offers a compelling mix of value, a 2.7% dividend yield, diversified income streams, and strong long-term prospects. Here's why Siemens deserves a place in any investor's portfolio.

How Siemens makes money

As a quick introduction to this company, here's a table of its key activities. Readers should note that Siemens Healthineers is a publicly listed subsidiary of which Siemens currently owns a 79% share. Siemens also owns 35% of Siemens Energy. For reference, Siemens Energy is a company created by Siemens via combining the former Siemens gas and power business with a 67% stake in renewable energy company Siemens Gamesa. Both parts of Siemens Energy are fierce competitors of GE in gas power and wind power

Business Unit

Revenue

EBITA 2020

Profit Margin

Activity

Key Competitors

Digital Industries

14.997 billion euros

3.252 billion euros

21.70%

Factory and process automation, industrial software, motion control

ABB, Emerson Electric, Schneider Electric, Rockwell Automation, Dassault Systemes

Smart Infrastructure

14.323 billion euros

1.302 billion euros

9.10%

Electrical and building products, digital grid solutions, distribution systems

ABB, Honeywell, Johnson Controls, Schneider Electric

Mobility

9.052 billion euros

822 million euros

9.10%

Rail infrastructure, rolling stock, traffic systems

Alstom, Bombardier

Siemens Healthineers*

14.460 billion euros

2.184 billion euros

15.10%

Imaging, diagnostics, advanced therapies

General Electric, Philips, Roche, Abbott Labs

Total Industrial

52.832 billion euros

7.650 billion euros

14.30%

n/a

n/a

Siemens Financial Services

716 billion euros

345 million euros

11.70%

n/a

n/a

Portfolio Companies

5.258 billion euros

(504 million euros)

(9.3%)

Energy businesses, logistics, commercial vehicles, mechanical systems

Assorted

Data source: Siemens presentations. *Siemens currently owns a 79% stake.

The investment case for Siemens

Simply put, Siemens is a highly cash generative company that trades a substantial discount to its various peers. In addition, it offers investors a nice mix of growth potential through its automation and industrial software (digital industries segment) and low-to-mid-single-digit-percentage revenue growth prospects in smart infrastructure.

Automation concept.

Siemens is shifting toward its core automation business. Image source: Getty Images.

Meanwhile, Siemens Healthineers (imaging, diagnostics, and therapies) and Siemens Mobility can be thought of as solid, low-growth businesses that provide steady earnings and free cash flow even as the economy goes up and down. These are properties that are set to improve with Siemens Healthineers set to acquire cancer-care-solution provider Varian Medical Systems in 2021. In addition, Alstom recently acquired Bombardier's transportation business and further consolidated the rail equipment industry, something likely to lead to potentially higher margins in the industry overall.

Valuation

Before discussing the company's growth prospects, let's pause to consider its valuation proposition on a price-to-free-cash-flow basis. As the graph below illustrates, Siemens stock trades at a clear discount to its peers on that metric. To be fair, it's complicated to pick a peer that allows for a true apples-to-apples comparison due to the mix of businesses at Siemens. GE would be an obvious candidate, but as many investors already know, GE was in the midst of an extended turnaround period even before 2020, and its substantial aviation businesses were particularly vulnerable to the pandemic.

The best way to think of Siemens' valuation would be to weigh its digital industries against a combination of Rockwell and Emerson Electric, put its smart infrastructure unit up against Johnson Controls, its mobility unit against Alstom, and pit Siemens Healthineers against Roche and Abbott Labs.

However you slice it, though Siemens trades at notable discounts to each and every one of them.

SIEGY Price to Free Cash Flow Chart

Data by YCharts

Current momentum and long-term growth

Moreover, the company is in good shape for its fiscal 2021. Having already reported its fiscal first-quarter earnings, management raised its full-year guidance on the back of stronger-than-expected growth in its industrial automation business, led by double-digit growth in Germany and China. That's pretty much in line with what Rockwell said it was experiencing too, although process automation spending remains weak at Emerson Electric, Rockwell, and Siemens.

Overall, the positive news means that management now expects mid-to-high-single-digit-percentage revenue growth compared to previous guidance for "moderate comparable revenue growth." Net income is expected to land in the range of 5 billion euros to 5.5 billion euros, up from 4.2 billion euros in fiscal 2020.

A man entering a CT scanner.

Siemens Healthineers imaging business provides steady cash flows to its parent company. Image source: Getty Images.

The momentum in industrial automation helps highlight the company's gradual shift toward focusing on its core strength -- namely, its high-margin digital industries segment. That's an attractive industry to be in -- and even more so due to the renewed emphasis manufacturers are putting on it as they look for solutions to the problems inherent in keeping plants open during a pandemic. Meanwhile, the explosion of Internet of Things applications in factories will drive long-term growth in automation spending

A stock to buy?

All told, Siemens offers an intriguing mix of value and growth for investors. It's cheaper than its competitors in the safe but low-growth healthcare and mobility (rail equipment) industry, and also cheaper than the big automation plays (ABB, Rockwell, and Emerson Electric), and other diversified industrials like Honeywell.

Throw in that 2.6%-yielding dividend, and investors should find Siemens an attractive stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.