Following the second profit warning this year, Siemens AG (ADR) (NYSE:SI) has ousted its CEO Peter Loscher and replaced him with the company’s CFO, Joe Kaeser. After watching how the company’s solar unit went down in flames, costing the company $1 billion in two years, Siemens AG (ADR) (NYSE:SI) will be shutting down the solar segment of the company altogether after being unable to find a buyer.
The finances
So just how bad are things for one of the largest German employers? On a year-over-year basis, Q1’s gross profit was down 9.1% and for Q2, Siemens AG (ADR) (NYSE:SI) issued a press release stating that it would not be meeting its profit targets. In the latest quarter, the company’s revenue was down 6.66% and operating income was even worse, decreasing 35.83%.
| Indicator | Siemens | Honeywell International | United Technologies |
|---|---|---|---|
| P/E TTM | 14.7 | 21.1 | 19.2 |
| Forward P/E | 11.8 | 14.9 | 15.2 |
| PEG Ratio | 1.4 | 1.6 | 1.5 |
| Revenue Growth (3 Yr. Avg) | 0.7 | 6.8 | 3.3 |
| Dividend Yield, % | 2.64% | 1.90% | 2.00% |
| Current Price | $111.19 | $84.40 | $107.06 |
Siemens AG (ADR) (NYSE:SI) has a P/E ratio of 14.1 at a time when industry average stands at 18, while the PEG ratio is at 1.4. It is currently closer to the top end of its 52-week range and has a market cap of $89.8 billion. While it offers an attractive 2.76% yield, organic growth has been scarcely present in the company as the EPS has been extremely volatile for the last six years.
In comparison, Honeywell International Inc. (NYSE:HON) and United Technologies Corporation (NYSE:UTX) are both overvalued compared to Siemens AG (ADR) (NYSE:SI) and also the industry average of 18.1. The forward P/E and PEG ratio also suggest overvaluation. However, unlike Siemens the two companies do not have to introduce job-cuts, shut down wind, solar, and lighting operations while suffering massive lag times on their orders.
In stark contrast to Siemens, Honeywell International Inc. (NYSE:HON)’s Q2 2013 earnings grew 13% as the company focused on boosting its margins to sustain profit growth as weaker economic expansion has slowed revenue gains. Honeywell International Inc. (NYSE:HON) counts the U.S. military, Boeing, and Airbus among its biggest customers, and has been cutting costs and improving productivity. Its revenue growth is expected to slow down further and does not warrant the high valuation.
Things are very different for United Technologies Corporation (NYSE:UTX) though. The company’s Q2 2013 earnings rose 17% as the company posted sales growth at most of its units. Furthermore, the company raised the lower end of its annual per-share earnings estimate by $0.15. United Technologies provides electrical power systems and aircraft wheels and brakes to Boeing, which is expecting a flurry of orders after The Paris Air show. Furthermore, as global demand and construction picks up, the company’s Otis line of elevators could be in for better times as well.
The prospects
At a time when European countries are struggling with austerity drives and financial mismanagement, Siemens is in the eye of the storm and is placed in the worst possible position.
The company’s clientele heavily depends on the developed world, which has reached a maturity stage, thus, only 0.7% revenue growth over the last three years. Siemens relied on China for a surge in revenue and was duly rewarded over the last couple of years, but now, China has shifted its course and is relying on lowered but consistent and prolonged growth. The country’s Q1 and Q2 GDP were 7.7% and 7.5%, respectively; coinciding with two profit warnings in a year.
Furthermore, the problem with Siemens today is of stagnation amid fears of dwindling growth — a three year average of the company’s revenue show only 0.7% growth which is trumped by the industry average of 3.4%. Until and unless Siemens shifts focus on developing countries, its growth prospects will be limited. Its competitor, General Electric, is tapping into Africa and Middle East to fuel its growth, perhaps Siemens should take a note out of the American company’s books.
Verdict
Siemens AG (ADR) (NYSE:SI)’ stock does not show promising signs for 2013 and 2014. It would be wise not to buy this stock as the timing does not favor investors, especially when a better alternative in the form of United Technologies is present, whose wide conglomerate operations shelter is from a slowdown in economy as well.
The article Here’s Why This German Giant Is No Longer a Good Option originally appeared on Fool.com and is written by Awais Malik.
Awais Malik has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Awais is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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