This week’s tip is Europe’s largest engineer, making everything from high-speed trains and medical scanners to generators and light bulbs. About half its earnings come from cyclical sectors, such as vehicle and property services. The other half relates to longer-term trends, such as healthcare, power generation, and oil and gas exploration.
Siemens (DAX:SIE), tipped as a BUY by Unicredit
The stock, along with rivals such as Emerson, GE and Philips, is seen as a bellwether of the global economy. In March, it issued a surprise profit warning, sending the share price down 30% to below e70. While disappointing, the sell-off looks overdone – this is a buying opportunity.
Siemens’ vast scale and strong positions in most of its markets mean it should prove resilient in tougher times. It is also shedding some of its more cyclical units and raising exposure to areas with more predictable income streams. In November, it expanded its medical business with the e4.9bn purchase of US laboratory diagnostics group Dade Behring; in December it offloaded its VDO Automotive unit to Continental for a whopping e11.4bn.
On top of this, Siemens makes around a third of its turnover from high-growth emerging nations, 48% from Europe and only 19% from the tougher US region. At the last quarterly results, the board was confident in its 2008 outlook, supported by several contract wins (up 15% and delivering a book-to-bill ratio of 1.3) and bolstered by a substantial order book. For example, Siemens recently secured a deal to provide 140 wind turbines to Scottish Power for what will be the largest onshore wind farm in Europe.
Chief executive Peter Löscher also reiterated that like-for-like revenues would rise at twice the GDP rate, and that the firm is on track to cut overheads by e1.2bn a year and lift operating margins to around 10% by 2010. These targets should be achievable; profitability would not be out of line with its peers.
Much of the savings will come from redeploying resources from western Europe into lower-cost territories. The City expects 2009 sales and underlying earnings per share (EPS) of e77.6bn and e5.68 respectively, rising to e81.6bn and e6.39 in 2010 – putting the shares on p/e ratios of 13.1 and 11.7. The balance sheet is also sound, with gearing at a comfortable 18%, representing net debt of e8.9bn.
Are there any catches? Siemens’ fortunes would be hit in a severe recession, or if its restructuring plans failed to deliver the desired benefits. It is also facing legal charges in several countries for allegedly bribing government officials to secure past infrastructure deals – although this risk is already in the price. Quarterly results are out on 30 July.
Recommendation: GOOD VALUE at e75.34
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments