Reality Bites for Siemens and ABB: Two of Europe’s Largest Industrial Companies Are Signaling All’s Not Well With the Global Economy

July 25, 2013, 12:09 p.m. ET

Reality Bites for Siemens and ABB

Two of Europe’s Largest Industrial Companies Are Signaling All’s Not Well With the Global Economy

ANDREW PEAPLE

If optimism about the global economy is steadily building, some of Europe’s largest industrial companies didn’t get the memo.

Siemens SIE.XE -5.98% shocked investors Thursday afternoon by revealing it won’t meet its target of a 12% margin on earnings before interest, taxes, depreciation and amortization by the end of its fiscal-year 2014, a key management aim. The German engineer’s shares slumped 6%. Swiss peer ABB‘s ABBN.VX -3.08% shares dropped 3.1% after a downbeat first-half earnings statement showed its order book declining across the globe. The message is clear: The economic climate for such companies is still very challenging. The question is which one is better placed to cope.Siemens’s short statement is more worrying. It gave little detail on why its profit margin will fall short and didn’t give a new target. Its Ebitda margin was 9.5% in the year to September 2012. The company said its cost-cutting program, due to deliver €6 billion ($7.9 billion) in productivity gains, is “largely on track.” Instead, it blamed “lower market expectations”—a sign the 2.5%-3% annual fall in sales prices it forecast last year could be much worse. The timing of its announcement is odd too, given third-quarter results are due soon on Aug. 1. And it is surprising that Siemens has given up on a target whose deadline is still 14 months away.

ABB is at least keeping its Ebitda margin steady, at 15.2% in the second quarter of 2013, against 15.1% a year ago. Its challenge lies in integrating major acquisitions made in the last year in the U.S., including electrical-products maker Thomas & Betts and solar company Power-One. Those deals are the legacy of Chief Executive Joe Hogan, who will leave ABB in September. The task of extracting synergies against a weak economic backdrop will fall to his successor, Ulrich Spieshoffer.

Still, such savings will be vital for ABB. Its return on capital employed will likely average 11.8% over 2013 and 2014, Berenberg estimates, only just above its 9% weighted average cost of capital. That, at least, is better than Siemens’s forecast average 8.1% return. For that reason, ABB, at 12.9 times expected 2014 earnings, deserves its premium to Siemens at 10.7 times after Thursday’s share-price falls, especially given the uncertainty around the German company. But the outlook for both industrial giants is hardly inspiring.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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