Siemens – The Renewable Energy Integrator?

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Last fall, I wrote an article for Seeking Alpha entitled, “Building a Clean Energy Portfolio; The Time is at Hand”. The piece was grounded in the International Energy Agency’s forecast that clean energy (electricity generated from renewable sources) is growing fast while the demand for dirty energy (fossil fuels) begins to ebb.

Segmenting the Market

To help me with my own thinking as well as for the benefit of others, I began that article by taking a stab at segmenting the clean energy market. I came up with six categories of providers ranging from “supply-side” producers of electricity – converters of solar, wind and geothermal energy, etc. – to “demand-side” users of such power, for example, to charge electric vehicles and other “appliances”. The full segmentation looks like this:

  1. Converters – the means to tap and turn the power of solar, wind, geothermal, hydro, tidal and other forms of clean fuel into electricity; generators, turbines, and photovoltaics.
  2. Storage – specifically, batteries (and capacitors), that enable the practical and economic retention and “buffering” of available electricity pending its final use.
  3. Distribution – grid solutions providing for the delivery of electricity; analogous to big oil’s midstream system of pipes and downstream networks of gas stations.
  4. Engineering – the specialized services of experts that support governmental and commercial electric projects, conversions, upgrades, and ongoing maintenance.
  5. Utilities – those that bring together and operate the elements above to meet the ultimate needs of consumers for electricity.
  6. Appliances – broadly defined to mean all devices that plug-in and draw power for whatever their end purpose including lighting, HVAC, transportation, etc.

With a couple of exceptions – e.g. GE (NYSE:GE); ugh – I have done very well in the clean energy space. However, a few months ago I decided to realize gains and move away from companies whose offerings are narrow. I became concerned that “one trick ponies” may not continue to do as well for various reasons including that: a) states and municipalities are auctioning off renewable energy rights/licenses pitting providers against one another to the determent of margins, and b) at the same time, these jurisdictions seem to be moving toward end-to-end solutions that integrate things from whatever power source right on to the grid.

The Call for Integration

I sensed that providers are responding to these forces by growing and integrating their offerings organically or via strategic alliances with other firms along the renewable energy spectrum. Specifically, I was drawn closer to Siemens (OTCPK:SIEGY) that already had a majority investment in Gamesa that recently overtook Vestas (OTCPK:VWDRY) the #1 wind company globally. I pointed out in another article that Siemens and AES (AES) formed a joint venture in Fluence Energy to deliver state-of-the-art battery and grid storage solutions. These are notable developments.

To be sure, Siemens has a few gaps in its integrated renewable energy “portfolio”. Although they are working in solar – as, for example, with micro-grids in Africa – they have yet to establish a solid presence in the space. Let us not forget though that, in 2010, Siemens was rumored to be interested in acquiring First Solar (NASDAQ:FSLR). I’ve learned over the years that while such overtures may fade they usually never disappear entirely. Food for thought.

Meanwhile, narrower companies seem to be struggling or falling by the boards. Vestas, as noted, has lost market share and Elon Musk recently announced that Tesla (NASDAQ:TSLA) is sharply scaling back its residential solar business, SolarCity. Sadly, the once venerable GE, appears to be so internally-focused that one wonders whether it’s too late for them to mount an effective offensive strategy in any new business much less one as far-reaching as renewable energy.

A Financial Argument

So that’s the strategic argument, what about the financial one? Well, it’s mixed. At $92 billion in revenues, we’re seeing renewed growth in Siemens’ top line and it carries down through operating income, pre-tax, net income, and to earnings per share. However, cash flow is bouncing around somewhat as the company positions its operations, investments and finances. But, its balance sheet is strong both with respect to liquidity and leverage. And, against all this, Siemens appears dogged on remaining lean and mean (in the eyes of its unions) through consolidation and spinoff activities in rail, healthcare, traditional power, and industrials.

Siemens/SIEGY S&P Global BMI Industrials
Price/Earnings 15.30x 18.86x
Price/Forecasted 16.05x 16.33x
Price/Sales 1.18x 1.17x
Price/Tangible Book 16.46x 2.61x
Price/Cash Flow 10.54x 12.32x
Return on Equity 15.50x 13.42x
Dividend Yield 3.39% 2.01%

As for valuation, 28 investment analysts cover Siemens/SIEGY. One analyst has it as a sell, none as an underperform, 7 as a hold, 2 as an outperform, and 18 as a buy. Their price targets range from $65.21 to $86.59 with the median pegged at $79.56 or 17% higher than Friday’s close of $65.83. The company pays a dividend yielding 3.39% that is protected by a 200+% coverage ratio. And, for trivia buffs out there, Siemen’s roots date back to 1847 and it ranks in the top-100 globally in market capitalization.

That’s all I got – a long-established world-class company, positioning itself in front of one of the largest global strategic growth trends in renewable energy, with solid financials, reasonably valued, well-viewed by analysts, and paying a respectable, protected dividend. What am I missing?

Disclosure: I am/we are long AES.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Always do your own due diligence in consultation with a licensed and competent financial adviser who understands your unique needs and puts your interests ahead of their own. Remember, there are added considerations in owning foreign securities including those associated with ADR sponsorship, buying and selling the pinks, foreign withholding taxes on dividends, and fees. (All my proceeds from contributing to SA go to charity.)

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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