Siemens Beats Estimates as Revamp Starts to Pay Off

Siemens AG reported earnings that beat analyst estimates as a restructuring program at Europe’s largest engineering company started to bear fruit and profit from factory automation and building technologies offset energy project charges.

Income from continuing operations rose 36 percent to 1.4 billion euros ($1.9 billion) in the fiscal third quarter, the Munich-based company said in a statement today. The average estimate of 10 analysts in a Bloomberg survey was 1.3 billion euros. Sales declined 3.7 percent to 17.9 billion euros.

The numbers come a year after Chief Executive Officer Joe Kaeser, hailed by analysts and investors for his focus on profitability, was promoted from finance head. In that time he has streamlined the company’s structure and strategy, focusing on “electrification, digitalization and automation” as he seeks to catch up with the profitability of U.S. competitor General Electric Co. The Siemens veteran has also pledged to end the charges which have consistently burdened earnings.

“Continued challenges in the energy business held back an even stronger profit improvement for Siemens as a whole,” Kaeser said on a conference call. Offshore wind projects in the North Sea and a Finnish nuclear plant “pose further financial risks going forward.”

Project Charges

The CEO has been finishing a cost-savings program started under predecessor Peter Loescher which aimed to boost profit to 12 percent of sales by the end of this financial year by cutting 15,000 jobs. The announcement last July that Siemens wouldn’t meet that target cost Loescher his job.

“It’s all broadly OK,” Frankfurt-based Commerzbank analyst Ingo-Martin Schachel, who rates Siemens a hold, said by phone. “The project charges mean that sector profit was slightly less than expected. Net level was super, but that is heavily impacted by lower holding costs and one-off timings, so I wouldn’t overemphasize it.”

The stock gained 0.2 percent as of 9:04 a.m. in Frankfurt trading today, valuing the company at 82 billion euros. The shares had rallied after Kaeser’s appointment last year, jumping 21 percent in his first five months while the DAX gained 15 percent. Before today, the stock has underperformed the benchmark index since the start of the year, falling 6.6 percent to the DAX’s 0.4 percent increase.

Alstom Battle

Kaeser is divesting businesses he deems peripheral such as hearing aids and molecular diagnostics, while building up units with better growth prospects. This year’s $1.3 billion acquisition of most of Rolls-Royce Holdings Plc’s energy assets is intended to allow Siemens to take advantage of the North American boom in shale gas extraction from hydraulic fracturing.

At the same time, Siemens’s effort to acquire Alstom SA’s gas turbine business this year lost out to a competing bid from GE. Should the Fairfield, Connecticut-based company’s takeover offer be approved by regulatory authorities, it will increase its footprint in Siemens’s home region. GE on July 18 delivered second-quarter earnings that matched analysts’ estimates, buoyed by rising sales in units making jet engines and gas turbines.

Siemens posted 155 million euros in charges for delays to power transmissions projects in the third quarter, adding to more than 1.1 billion euros in such costs since 2011 and 350 million euros for late train deliveries. Tenders for projects where Siemens has no prior experience must now first be approved by the management board.

Cyclical Recovery

Mounting charges at solar and offshore wind projects also prompted Zurich-based competitor ABB Ltd last week to report a drop in net income.

Profit at Siemens’s industry sector jumped 51 percent to 548 million euros, while falling 5.8 percent at the energy sector to 405 million euros and dropping 13 percent in health-care. The infrastructure and cities sector reported a 350 million-euro profit after a 23 million-euro loss a year earlier.

“The cyclical recovery should accelerate from the fourth quarter onwards,” Frankfurt-based DZ Bank analyst Jasko Terzic wrote in a note to clients, reiterating his buy recommendation. “Profits in industry were better and this should deliver profitability going forward.”

Siemens reiterated it expects basic earnings per share to increase 15 percent this year, with revenue excluding acquisitions remaining on a similar level and orders exceeding sales.

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