We maintain our Neutral recommendation on Siemens AG (SI). Both revenue and orders increased year-over-year in the first quarter of fiscal 2012, though not up to the mark. Revenue also increased sequentially for the sixth quarter in a row.
The order backlog for all the sectors hit EUR102 billion at the end of the first quarter 2012. However, apart from Healthcare, the other sectors of the company reported revenue decline for the latest reported quarter. Orders in the Industry sector declined due to lower volumes of large orders compared to the prior year.
Healthcare grew 4% year over year primarily driven by a two-year global initiative, ‘Agenda 2013,’ which is aimed at improving the sectors competitive position and expanding its capacity for innovation. Overall the company had a modest quarter as it had a negative cash flow due to increase in trade and other receivables, especially in energy and healthcare.
Siemens is a global leader in most of its key businesses, including industrial automation, power generation, medical equipment and transportation. Given its product breadth and geographical diversity, the company is major beneficiary of increased spending as developing nations build up their infrastructure. Its core businesses have seen a pickup in demand and the company is well positioned and is looking for further growth primarily in the emerging markets.
Siemens Healthcare is one of the rapidly growing segments of the company with good underlying profitability. The company has a flexible business model with a 3% order growth. The company’s healthcare operations in the U.S. are more or less stable while its growth in the emerging markets is robust.
One of the main revenue drivers for the segment during the latest reported quarter is China, with strong double-digit growth. To further, improve its profitability in the segment the company intends to execute AGENDA 2013 program, primarily to increase competitiveness and accelerate innovation.
However, the company operates in highly-competitive markets that are subject to price pressures and rapid changes. Its businesses must keep pace with technological changes and develop new products and services to remain competitive.
Moreover, its financial performance may be affected by cost overruns. The company is exposed to currency and interest rate risks as well as to widening credit spreads. Future financing via corporate treasury may be impacted by uncertain economic conditions and development of capital and bank markets.
Siemens currently holds a Zacks Rank #3 which implies a short term Hold’ rating on the stock.
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