Industrials

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Siemens AG CEO Joe Kaeser jokes that, with hindsight, he should have called his strategy for overhauling the German conglomerate "Making Siemens Great Again." Instead, he chose the more prosaic "Vision 2020."

Kaeser gets zero points for humor. And while he deserves credit for turning around a perennial under-performer -- the stock is now at the highest since 2001 -- achieving greatness will have to wait for another day.

Gaining Ground
Siemens shares are at their highest since the collapse of the dotcom boom
Source: Bloomberg

Before taking the top job in 2013, Kaeser was CFO during a time when the company repeatedly warned on profits, a predilection that led to the exit of the previous CEO, Peter Loescher.

Reliable Partner
Siemens has consistently beaten earnings expectations in recent quarters
Source: Bloomberg

Kaeser recognized the importance of giving the market what it wants: consistency. Siemens has repeatedly beaten earnings guidance in recent quarters and, just as he did this time last year, he began the new fiscal year by raising guidance for full-year earnings on Wednesday.  

One shouldn’t read too much into the gain in industrial operating margin and 25 percent increase in net income. There were several one-time items that flattered those figures.

A new joint venture for electric cars contributed almost a percentage point of margin improvement, while earnings were boosted by a 400 million-euro ($431 million) adjustment linked to a legacy nuclear project and a disposal.

But make no mistake –- Siemens is doing a lot better these days. One big reason: the company has stopped shooting itself in the foot.

Siemens used to report massive impairments and losses on large contracts with unnerving regularity -- since 2001, the company racked up 36 billion euros of charges, according to Morgan Stanley.

Under Kaeser's greater focus on risk management, those charges have now all but disappeared. Cost-cutting and a greater focus on under-performing units have helped too.

Importantly, the company’s sales are also expanding again after a long period of stagnation or decline. The industrial software business has been a particular source of growth.

That’s all the more impressive because the macroeconomic environment for capital goods companies is still pretty dismal -- sales at General Electric Co. fell 2 percent in the latest quarter compared with a 3 percent rise at Siemens.

Consistency and top-line growth have helped lift Siemens shares by almost 40 percent over the past year, a far bigger gain than GE.

On the Up
Siemens shares have gained almost 40 percent over the past year
Source: Bloomberg

Yet despite better earnings, Siemens’ shares still trade at a near 15 percent discount to peers, including GE. To close that gap several things need to happen.

The operating margin at Siemens's industrial businesses, which increased to 13 percent in the latest quarter, is some way from best-in-class. Rockwell Automation Inc. and Emerson Electric Co. both achieved a 17 percent Ebit margin last year.

Middle of the Pack
Siemens's profitability has improved, but the company still has work to do to catch rivals
Source: Bloomberg

Return on capital is also sub-optimal. Kaeser could address that by not overpaying for acquisitions, something Gadfly noted here.

Further profit expansion won't be easy given the still frail outlook for global industrial demand.

Chinese demand that helped fuel strong growth at Siemens's industrial software business can't continue forever. The country has pared back a tax incentive that stoked demand for autos.

And then there’s Trump. The U.S. accounts for about 22 percent of Siemens's sales. While fresh infrastructure spending and changes to the U.S. tax code could help Siemens, a net exporter from the U.S., Trump’s daily mis-steps and divisive language only adds uncertainty to the environment for business investment.

Rather than making Siemens great again, Kaeser may have to settle for making Siemens competitive again.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net