The euro has suffered from the Greek debt crisis, and Spain and Portugal also are under closer scrutiny. But there are still significant opportunities for profit in the Eurozone.
Germany, for example, has the lowest debt to gross domestic product (GDP) ratio of all the major advanced industrial economies. And right now, it is taking measures to bring its budget deficit quickly into line. Despite a very rigid labor system, Germany is the second-largest exporter in the world, right after China. And the recent euro sell-off has given an extra "subsidy" of some 25% to German exporters.
This "subsidy" is likely to last for quite a while, since the structural situations of weaker European Union (EU) member countries will take time to resolve. It goes way beyond just having European banks pass some stress tests. So we are going to take advantage of a prudently managed exporting powerhouse with Siemens AG (NYSE ADR: SI).
Siemens is a conservatively run firm. It has very low levels of debt, which is rated in the middle of the investment grade scale (A). And despite the weakness in Europe, it has managed to increase its bottom line by 50% from last year's levels.
More importantly, it is one of the strongest players in the world in the next wave of electricity technology: smart grids. Demand for electricity is growing immensely, especially in emerging markets, since it has almost a perfect correlation with economic growth, and Siemens is in prime position to profit.
Siemens is a very diversified conglomerate, with different lines of businesses. Their main activities comprise industry automation, building and drive technologies, and energy and health care, mainly. It also owns lighting company Osram.
While most businesses are sensitive to the business cycle, Siemens' diversification protects it from severe downturns. What we have seen so far is that short-cycle businesses, especially energy, are showing a strong recovery.
This is especially true in green technologies. That's good for Siemens, which leads in offshore wind generation, and enjoys the second spot in onshore wind generation technologies in the United States. It recently developed the most efficient gas generation turbine in the world, which is already producing strong orders in Europe and should be followed by orders from the United States.
Similarly, Siemens is experiencing success with Velaro high-speed train orders in Germany, Spain, China, and Russia.
In fact, Siemens just inked multi-billion dollar deals to produce wind turbines and trains for Russia. The size of the recent deal was undisclosed, but a few figures were known. The company will supply Russia wind turbines capable of generating 250-500 megawatts of energy, and it expects to get up to 5,000 megawatts by 2020. Siemens also will launch two research facilities locally over the next five years.
The deal is so big that Russia even agreed to make visa requirements more flexible for Germans. This is a very strong long-term growth deal for Siemens and the company has gained a very strong foothold in one of the major BRIC economies.
But Russia is just the beginning of the story. Siemens will benefit from the cheaper euro, as it exports to Asia and Australia, which have been the company's main growth drivers.
Additionally, Siemens is implementing a long-term restructuring plan to drive up efficiency.
The company has increased the overall efficiency of its management and global suppliers and has disposed of unprofitable operations. That's why expenses related to selling, general and administration functions have decreased by 16% since 2007 and revenue has increased.
The success Siemens has had in high technology export-oriented industries allowed the company to increase its guidance for this year by 20% - to $9.7 billion (7.5 billion euros) from a range of $7.8 billion - $8.4 billion (6 billion euros - 6.5 billion euros).
The recent business with Russia and the weakness of the euro - which effectively subsidizes German exports and reduces the employment cost of Siemens' European workforce - should allow the company to keep increasing profit margins and revenue estimates for the future. Siemens reports on July 29.
The stock is in a traditional, very bullish long-term (five year) "cup and handle" pattern, where the handle, looked at in detail from the second half of last year until today, shows a very well established range between $87 and $102 per share. Right now, it is barely above the middle of that range, bumping up against some short-term resistance at $97.
Short term, I believe that the stock will have to trade up. Its Price/Earnings/Growth (PEG) ratio is ridiculously low, meaning that we are paying very little for the earnings growth that Siemens is showing. I expect Siemens to keep raising earnings estimates as it gains traction globally, cuts costs and benefits from the weak euro.
Recommendation: Buy Siemens AG (NYSE ADR: SI) (**). Short-term players should buy into any weakness before the company's July 29 earnings announcement. And long-term players might even see their shares double over the next two years if they buy now and hold.
(**) - Special Note of Disclosure: Horacio Marquez holds no interest in Siemens AG.
[Editor's Note: Horacio Marquez knows how to make a market call. It was Marquez who told investors that lithium was going to be big - a year before other "experts" made the same call. Now Marquez has isolated the major profit opportunities being created by the possible broadband breakdown - a situation that the news media is only just now starting to understand. To find out all about those top profit opportunities, check out this new report.]
News and Related Story Links:
- Money Morning News Archive:
Buy, Sell or Hold Feature.
- Money Morning:
How to Profit From Europe's Stealthy Resurgence
- Money Morning:
Why Investors Must Keep an Eye on Spain