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Coverage Initiation: Siemens AG
Value Line recently initiated coverage of Siemens AG (SI), one of the largest conglomerates in the world, with operations in more than 190 countries. It is based in Germany and employs approximately 350,000 individuals. However, like most other corporations, Siemens came from humble beginnings.
The company can trace its roots back to the 1840s, when Werner Siemens, Johann Georg Siemens, and Johann Georg Halske founded Telegraphen-Bau-Anstalt Von Siemens & Halske (Telegraph Construction Firm of Siemens & Halske) in Berlin. Initially, it built telegraph installations and other electrical equipment, and then soon began putting up telegraph lines throughout Germany, Russia, and the United Kingdom. Over the next several decades, the company greatly expanded its product lines and began manufacturing cables, telephones, electrical power supplies, and lighting, among other offerings. In 1932, Siemens merged with Reiniger Gebbert & Schall, which produced medical diagnostic and therapeutic equipment, including X-ray machines and microscopes.
During World War II, Siemens produced vast quantities of war materials, but due to constant air bombings and the eventual defeat of Germany, the majority of the company’s factories and facilities were destroyed. Following the conflict, all of the company’s material assets were confiscated by the Allied Powers, its trademarks were lost, and its patent rights were rescinded. As a result, it seemed like Siemens would cease to be. In the 1950s, management aggressively sought to rebuild the company and expanded its market reach internationally. One of its first major projects was to build a steam power plant in Argentina. It later expanded into computer technologies, and bolstered its home appliance, telephone, and medical supplies businesses. In 1966, through a series of mergers, Siemens AG was established, which formed the basis for the company’s current operations.
The company, which is now headquartered in Munich, operates in four main business segments; Industrial, Energy, Healthcare, and Infrastructure & Cities. The Industrial sector is Siemens’ largest, and consists of six divisions. Products include programmable logic controllers, standard motors, and compressors. It is also engaged in the planning and building of large construction projects. More than 40% of the company’s total revenues are derived from the Industrial sector.
The Energy division is a leading supplier of a wide range of products, including turbines and generators that are vital to power plants and power distribution. This division accounted for more than 37% of the company’s total revenues in fiscal 2011 (years end September 30th).
The Healthcare sector designs and manufacturers large-scale medical devices, such as X-ray equipment and computer tomographs. It also produces a wide variety of diagnostic testing systems and clinical laboratory automation solutions. In fiscal 2011, this division was responsible for 17% of Siemens’ total revenues.
Infrastructure & Cities, Siemens’ newest division (formed in 2011), is focused on products and solutions for urban areas. It is involved in railroad construction and operation, airport logistics, and utilities procedures. It accounts for about 6% of the company’s top line.
Siemens is among the leaders in several cutting-edge fields, but in most cases, stiff competition exists, particularly from other multinational conglomerates like General Electric (GE – Free GE Stock Report) and Philips Electronics (PHG). Thus, in order to remain relevant, the company invests heavily in research and development. In fiscal 2011, the company spent more than $5.3 billion on R&D. Going forward, it is vital that these expenditures bear fruit, and help Siemens improve its existing product portfolio, as well as lead to the introduction of new offerings.
Along with R&D, for many years, Siemens has been aggressive on the acquisition front. It has bolstered its technology and market reach via the purchase of other companies, and it is likely that these activities will play an integral role in the future, though it is important to note that the success of any purchase is far from certain. In addition, proper financing and various regulatory approvals must be obtained before any purchase can be finalized.
As mentioned, the company operates in more than 190 countries and, thus, has material exposure to pricing fluctuations and currency risk. In addition, political unrest, economic weakness, and armed conflicts pose a threat to Siemens’ profit potential. For example, due mainly to hefty debt loads, the euro zone has been dealing with a number of financial ills. As a result, municipalities, corporations, and individuals in the region have reduced spending, which has hampered Siemens’ performance of late. In addition, the euro has fluctuated wildly compared to the U.S. dollar and other currencies.
Siemens AG has been publically listed in Germany since 1899. Its American Depository Receipts (ADR) have traded on the New York Stock Exchange since March 12, 2001 (Ticker: SI). One Siemens ADR corresponds to one share of common stock.
Income-oriented investors should note that while Siemens has been returning a good deal of its profits to shareholders via dividend payments, it is a foreign company. As such, the dividends may be subject to withholding taxes. Moreover, dividend policies are generally different in Europe—the company distributes its payout only once a year in late January, which adds an element of risk. Furthermore, overall, there is less of a stigma attached to dividend cuts in Europe.
For a detailed evaluation of Siemens’ current business prospects and the equity’s investment merits, subscribers are advised to monitor our regular quarterly coverage in The Value Line Investment Survey, while keeping an eye out for Supplementary Reports when breaking news takes place.