Good order growth and increasing profitability at the narrow-moat company led to the boost.
We increase our fair value estimate for Siemens
to EUR 125 per share from EUR 114 for the local shares and to $68 per share from $60 for the ADR, owing to positive adjustment factors such as the time value of money, fine-tuning of assumptions for 2017-18 in our model, and lower pension deficit (EUR 10.5 billion at end March 2017, versus EUR 11.1 billion at end December 2016). We maintain our narrow moat rating. Owing to higher-than-expected order and revenue growth rates in the first six months of 2017, we have increased our 2017 and 2018 revenue growth rates. Our model assumes a five-year earnings CAGR of 3.6%, reflecting strong activity in wind power (especially in 2017), power and gas, digital factory, and healthcare, but modest growth in mobility and process industries and drives, driven by global activity. Double-digit revenue growth in the wind power and renewables division, compensating for a low-single-digit decline in process industry and drives, translates into 4.1% expected revenue growth for 2017 (we previously projected 3.2%).
Jeffrey Vonk, CEFA, is an equity analyst for Morningstar.
We forecast 12.1% operating margins for Siemens' industrial business in 2017 (previously 11.9%), with further expansion to 13.2% for 2021. In the second quarter of 2017, Siemens’ industrial business margin expanded 120 basis points; we expect management’s focus on fixing underperforming businesses and cultivating operational excellence will further enhance operating margins. Our estimates are at the high end of management's 2017 outlook, with the industrial business' profit margin in the 11.9%-12% range. Siemens’ focus on portfolio optimisation and cost reduction mitigates the impact of cyclical swings and ongoing weakness in oil and gas and other commodity-related markets. However, owing to recent share price gains, we believe the shares are slightly overvalued.
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