Bank of America has reiterated its 'underperform' rating for Siemens Ltd., citing significant execution challenges despite robust order inflows.
Siemens reported a 32% year-on-year decline in operating income for the second quarter of fiscal 2025, significantly missing BofA and consensus estimates. The company follows an October-September cycle, which makes the January-March period its second quarter.
Revenue growth was modest at 2% year-on-year which also fell short of expectations. This was primarily due to an 18% decline in the mobility segment. Ebit margins contracted by 460 basis points year-on-year, driven by demand normalisation in digital industries. However, order inflows surged by 43% year-on-year, buoyed by a large order win in the mobility segment.
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Siemens has flagged continued softness in its digital industries segment, which is heavily reliant on short-cycle orders, due to sluggish private capital expenditure. Margins in this segment compressed to 5%, down from 16.5% in the second quarter of FY24. With ongoing global macroeconomic uncertainties, BofA expects private capex to grow at a muted 13% compound annual growth rate over FY25-27.
BofA anticipates further execution slippages, which could lead to potential earnings downgrades. While Siemens is well-positioned to secure additional large orders in the mobility segment, the long-cycle and lumpy nature of these orders could delay revenue recognition. This is expected to drive further cuts to street estimates for earnings, the brokerage noted.
Post-energy demerger, Siemens' stock trades at 54 times the two-year forward price-to-earnings ratio, above its long-term average of 52 times. Given the anticipated execution delays and weak private capex backdrop, BofA sees downside risk to consensus revenue and margin expectations. The brokerage expects valuations to revert to the mid-cycle average of 44 times. Consequently, they have rolled forward their earnings and reiterated their 'underperform' rating, projecting just a 10% earnings CAGR over FY25-27, with limited valuation comfort.
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