As the economic storm clouds gather, investors have piled into a range of safe havens, from the Swiss franc to German government bonds, pushing them to bubble levels. I prefer to take my chances with equities with compelling valuations.
Siemens (DAX: SIE), rated a BUY by Société Générale
Siemens is Europe’s largest engineer, making everything from wind turbines and diagnostic imaging equipment to power generators and high-speed trains. Most of its leading products are protected by a research bank of 57,900 patents.
In June the firm won a coveted £1.4bn rail contract to deliver 1,200 new carriages to modernise Thameslink’s rolling stock, along with a £500m deal to supply 108 turbines for a giant windfarm being constructed in the Irish Sea. At the end of July, the chief executive, Peter Löscher, said: “We are on track to reach our targets for the year to September and… our markets are still robust.” His confidence is underpinned by a €96bn order book, and cast-iron positions in most of its chosen sectors.
What’s more, a third of the business comes from rapidly expanding emerging nations. A fair chunk of profit is derived from industries addressing long-term themes such as urbanisation, ageing populations, globalisation and climate change. This gives the group excellent defensive qualities even in the event of another recession.
That said, the directors are not sitting around twiddling their thumbs. Like-for-like sales rose an impressive 8% last quarter, with order intake jumping a jaw-dropping 25%, thanks to a €3.7bn contract with Deutsche Bahn for high-speed trains. The board also continues to rebalance the portfolio by shedding some of the more cyclical units and increasing exposure to areas with higher-quality income streams. It plans to make an initial public offering of its Osram lighting arm later this year (conditions permitting), which could pull in a tasty €3bn windfall.
The City is forecasting 2011 revenues and underlying earnings per share (EPS) of €73.4bn and €7.72 respectively, rising to €76.9bn and €7.85 in 2012. That puts the shares on undemanding price/earnings (p/e) ratios of less than nine. The balance sheet is almost bullet-proof too, with net debt at a comfortable €5.8bn, equivalent to a mere 0.5 times forward earnings before interest, tax, depreciation and amortisation (EBITDA).
This financial muscle is important because it gives Siemens plenty of fire-power to hoover up acquisitions at rock-bottom prices. It could also choose to return the funds to shareholders in the form of buybacks or improved dividends, on top of a not-to-be-sniffed-at 4.4% yield. I value the group on an EBITA multiple of ten. Adjusting for the loans and a €6bn pension deficit, that generates an intrinsic worth of €100 a share.
Siemens’ fortunes would be hit in the event of another severe slump or a disorderly disintegration of the euro. All the same, with first-class technology across a broad spectrum of sectors and geographies, this stock ticks all the right boxes. Société Générale has a target price of €94. Next quarterly results are due out on 10 November.
Rating: BUY at €66 (market capitalisation €58bn)