Germany's industrial giant Siemens (SIEGY 1.21%) remains a curiously undervalued stock. The company recently blew away estimates with its first-quarter 2022 earnings, and management continues to restructure toward long-term growth markets like automation, industrial software, and smart infrastructure. Meanwhile, its mobility business (rail infrastructure and rolling stock) and 75% stake in Siemens Healthineers offers solidity and cash flow. Throw in an attractive and growing dividend, and Siemens is one of the most significantly undervalued stocks in the industrial sector. Here's why.
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Three reasons to buy Siemens stock
The investment case for buying the stock rests on three main pillars:
- Automation, industrial software, and smart infrastructure are desirable end markets and benefit from the so-called "fourth industrial revolution," where the digital and physical worlds interact iteratively to produce better outcomes.
- Mobility and the Siemens Healthineers stake give downside protection in a cyclical slowdown and provide significant cash flows to support dividend growth across a range of market conditions.
- The recent results demonstrated excellent earnings and orders momentum (up 42%), and the stock trades on a superb valuation.
The fourth industrial revolution
The following table helps outline the key developments and importance of each segment, focusing on digital industries (factory automation contributes 67% of revenue and industrial software around 26%, with customer services making up the rest) and smart infrastructure (building controls and fire/safety products contribute 45%, with electrical products at 28%, and electrification solutions at 27%).
They are all attractive markets to be in, and in each market, Siemens' peers are also reporting strong numbers. For example, Rockwell Automation expects its automation organic sales to increase by 15% in 2022, driven by strength across all its sectors as the industrial economy increasingly adopts automated production. Similarly, Rockwell's industrial software partner, PTC, continues to grow its critical annual run rate metric in the low teens.
Siemens' smart infrastructure rival Johnson Controls believes its revenue will grow at a 6%-7% rate until 2024. In addition, Johnson Controls' management thinks it's part of a $250 billion market opportunity over the next decade as building owners retrofit buildings to meet carbon emissions targets and improve building performance with digital technology.
|
Q1 2022 Performance by Segment |
Orders (in millions of euros) |
Growth |
Revenue (in millions of euros |
Growth |
Profit (in millions of euros) |
Free Cash Flow (in millions of euros) |
|---|---|---|---|---|---|---|
|
Digital Industries |
7,110 |
67% |
4,347 |
11% |
947 |
478 |
|
Smart Infrastructure |
4,938 |
26% |
3,809 |
6% |
480 |
107 |
|
Mobility |
5,390 |
94% |
2,410 |
7% |
224 |
106 |
|
Siemens Healthineers |
5,877 |
8% |
5,068 |
10% |
810 |
743 |
|
Industrial Business |
23,314 |
44% |
15,634 |
9% |
2,461 |
1,435 |
Data source: Siemens presentations.
Solidity across a range of market conditions
Digital industries and smart infrastructure rely on economic growth to drive revenue, but the mobility business and Siemens Healthineers follow the beat of a different drummer. Investment in rail infrastructure, healthcare equipment, and diagnostics tends to be less cyclical. That's good news for Siemens investors because it ensures healthy cash flow through the cycle that can be used to pay and increase dividends.
For example, the two businesses contributed 4 billion euros in free cash flow in 2021, compared to 9.8 billion euros for the total industrial businesses. Moreover, the cash flow from the two businesses proved to be a solid support to the 3 billion euros in dividends that Siemens paid to investors and non-controlling interests in 2021.
Good momentum, excellent valuation
A quick look at relative valuations shows that Siemens is undervalued compared to its peers. For example, in automation, Rockwell, Schneider, and ABB trade on higher multiples, as do PTC and Dassault in industrial software. In smart infrastructure, Schneider, ABB, Johnson Controls, and Honeywell all trade at a premium. While in mobility and healthcare, Alstom and Philips have higher valuation multiples.
The comparisons aren't perfect, but if you mix and match these companies to produce a Siemens clone, it would still have a significantly higher multiple than Siemens. The point is that Siemens trades on a lower valuation than all the businesses that it competes with, so any "sum-of-the-parts" analysis (comparing Siemens to individual peers) will produce a result suggesting Siemens is a very good value.
SIEGY Price to Free Cash Flow data by YCharts
As you can see in the first table above, Siemens started its fiscal 2022 in great shape with exceptional orders growth. Much of it was driven by customers pulling forward orders in light of supply chain difficulties and the anticipation of higher pricing down the line. Still, management expects mid-single-digit revenue in 2022, resulting in 8.70 euros to 9.10 euros in adjusted earnings per share. That's more than enough to support the 4 euros per share dividend, which translates to slightly more than 3% dividend yield for the U.S. listing. All told, Siemens looks like an excellent value stock.
