Siemens Has Carved Itself a Wide Moat, Shares Appear Undervalued to Our Revised Valuation

We raise our fair value estimate for Siemens SIE to EUR 166 from EUR 160 after taking a fresh look at the business, which also sees us raising our economic moat rating to wide. The spinoffs of its cyclical energy and wind turbine divisions in 2020, combined with an increasing mix of revenue generated from its formidable industrial software offering, have improved the quality of the group and provide more durable returns than in the past. Shares are trading in undervalued territory and at a larger discount than its European capital goods peers, despite its superior market outlook. We believe the market is overstating the perceived cyclicality of the business and its strongly competitive advantaged business units, which warrant a higher multiple than its current 14 times forward P/E ratio.

Siemens enters the end of its 2023 financial year with a record EUR 110 billion order book backlog, which, combined with anticipated market shares gains due to its unique blend of software and mission-critical equipment, will offset cyclical headwinds within its digital industries segment. We forecast double-digit annualized earnings per share growth during our forecast period. Each of its industrial businesses are well positioned for secular growth themes, such as the energy transition, digitalization, and industrial automation. Siemens was very early to identify the convergence of industrial hardware and software markets. The group has made several acquisitions starting in 2007 to establish itself as a leading competitor in the fast growing product lifecycle management software vertical. Through its integrated product portfolio, Siemens has established more meaningful customer relationships and increased customer switching costs.

Its progressive dividend policy remains firmly intact, and its healthy balance sheet provides significant opportunity to increase shareholder returns through capital return or acquisitions.