Siemens Earnings: Mobility Segment Offsets Declining Order Trends

Narrow-moat Siemens SIE reported 15% organic order growth, which appears impressive, but fails to tell the complete story due to several large order wins in the mobility segment. Destocking for short-cycle products, which do not need to be bought far in advance, due to the easing of supply chain constraints and a strong prior-year comparable led to order declines in the digital industry and smart infrastructure segments of 35% and 1%, respectively. Group revenue and EPS guidance are unchanged, having been raised during the previous quarter. We aren’t overly concerned by possible short-term headwinds from destocking due to the group’s EUR 110 billion order backlog, with few cancellations, as well as Siemens’ book/bill ratio of 1.28 times. We believe quarterly demand volatility doesn’t detract from Siemens being well positioned for the digitalization of industrial activities. We maintain our fair value estimate of EUR 160 for Siemens and view shares as marginally undervalued.

Organic revenue grew 10%, supported by double-digit growth across all industrial businesses except for Siemens Healthineers. Consistent with other capital goods manufacturers, revenue growth was supported by strong backlog execution for longer-cycle business segments. Software revenue for the digital industry segment only grew 1%, mostly due to a timing shift in the implementation of projects, and is thus expected to improve sharply next quarter. Siemens achieved an impressive 15.3% EBIT margin; therefore, if we exclude a one-off gain from a sale from the prior year this translates into a 270-basis-point expansion. While management lowered its EBIT margin guidance for the digital industry segment to between 22% and 23% (from 22.5% to 23.5%), the group outlook is unchanged since the smart infrastructure segment continues to exceed expectations.

Below the line, Siemens recorded a EUR 647 million loss for its 25% investment in Siemens Energy due to weak performance, particularly within Siemens Gamesa.