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Siemens Cuts Profitability Forecast Amid Market Slowdown

Siemens AG (SIE), Europe’s largest engineering company, cut its profitability forecast, dealing a new blow to Chief Executive Officer Peter Loescher’s attempts to catch up with General Electric Co. (GE) and ABB Ltd. (ABBN)

The company, which makes products from power turbines to high-speed trains, no longer predicts an operating profit margin of at least 12 percent of sales in the 12 months through September 2014, Munich-based Siemens said in a statement today, citing “lower market expectations.” Spokesman Guenter Gaugler declined to comment beyond the statement. The stock dropped as much as 7.6 percent, the biggest slump in more than four years.

Loescher, an Austrian national who joined Siemens in 2007 from drugmaker Merck & Co. as the first CEO hired from outside the company, started a savings program last year after acknowledging he had been slow to react to the economic downturn. Following rising charges for delayed train deliveries and faulty wind turbines, in May he said that 2013 profit will approach the low end of a previous prediction of between 4.5 billion euros ($6 billion) and 5 billion euros.

“The operating profit is shrinking and the one-off effects continue to grow,” said Kronberg, Germany-based Fairesearch analyst Heinz Steffen, the only analyst surveyed by Bloomberg who recommends selling Siemens stock. “Siemens wins these huge projects, but then with deals such as the ICE trains for Deutsche Bahn, it doesn’t then manage them effectively and costs increase.”

Faulty Turbines

Siemens fiscal third-quarter profit for the three months through June has also been hurt by about 100 million euros in costs for faulty wind turbines, according to people familiar with the matter.

The German company, which is scheduled to report fiscal third-quarter earnings on Aug. 1, said this month it’s replacing the wind unit’s head Felix Ferlemann with Markus Tacke after the company slowed and stopped 707 wind turbines. The move followed blade breaks at a turbine in California and one in Iowa.

The new charges add to provisions of 550 million euros for offshore power transmission problems and delays in train deliveries reported earlier this year. In June, Siemens said it will close its solar power unit after struggling to find a buyer following losses of at least 784 million euros since 2011. The company paid $418 million to acquire Beit Shemesh, Israel-based Solel Solar Systems in 2009.

Nokia Boost

At the same time, Siemens’ earnings this year will be boosted by about 300 million euros from selling a stake in Nokia Siemens Networks, the people said.

To cushion the impact of more charges and a decline in demand, Loescher this year raised a savings target to 6.3 billion euros from 6 billion euros. Charges related to cost cuts will reach as much as as 900 million euros this year, the company has said.

Siemens said today that “measures for optimizing the portfolio and reducing costs are largely on track.” Siemens had a profit margin of 9.5 in 2012, when ABB and General Electric had margins of 10.3 percent and 15 percent respectively.

Siemens dropped as much as 6.35 euros, the biggest decline since March 2009, to 77.27 euros, valuing the company at 68 billion euros. Before today, Siemens had gained 5 percent this year, while GE gained 18 percent.

Economic Slowdown

William Mackie, a London-based Berenberg analyst who recommends buying Siemens shares, said that Siemens is suffering as a result of the the economic slowdown.

“Following the developments in a number of their end markets in power and industrial, it’s not a complete surprise that the growth expectations into the next twelve months are going to be lowered somewhat,” he said.

Electricity production levels at U.S. power plants have shrunk in each of the past three months, while European industrial capacity utilization for 2013 is 1.8 percent lower than the previous year, according to data compiled by Bloomberg.

Loescher also has said that his job at Siemens isn’t made easier by the economic headwind he’s facing.

“We are missing a growth engine around the world,” Loescher, for whom this is the fifth forecast cut in his six-year tenure, said in a Bloomberg Television interview in May.

Shares of Swiss rival ABB today declined the most in more than five weeks after the world’s largest maker of power transformers said second-quarter orders fell 7 percent because of lower power-utility investments in Europe.

U.S. rival General Electric last week reported second-quarter profit that beat analysts’ estimates as demand for jet engines and oil-and-gas drilling equipment drove the order backlog to a record.

To contact the reporter on this story: Alex Webb in Munich at awebb25@bloomberg.net

To contact the editor responsible for this story: Simon Thiel at sthiel1@bloomberg.net

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