Goldman Sachs wiederholt Siemens auf Conviction Buy

Delivering in a tough environment; Reiterate Conviction Buy

What's changed
Siemens reported a solid set of 1Q results with underlying sector profit of €2,129 mn ahead of our expectation of €1,890 mn (+c.13%), driven by 4% better than expected revenue performance and 8% stronger underlying margin. The biggest beat came from the Energy sector (34% ahead at the underlying EBIT level), while Healthcare and Industry delivered a broadly in-line performance. Order intake remained encouraging in our view (bookto- bill of 1.15x at the sector level), taking into account the extremely challenging macro-environment during calendar 4Q.

Implications
We have significantly revised the divisional make-up of our forecasts but continue to expect c.€7.2 bn of sector profit in FY09 ( vs. guidance of €8- €8.5 bn).While we reduce our 12-month target price to €62 from €65 (driven by c.2%-4% cuts to underlying EPS due to higher than expected financial interest), we reiterate our Conviction Buy on the stock. Our core investment thesis remains unchanged: that Siemens remains a company with significant potential in terms of cost cutting (mainly SG&A and sourcing) to offset margin pressure during the recession, as well as a likely more resilient financial performance due to significant portfolio change over the last five years.

Valuation
The stock is trading on 4.9x CY2010E EV/EBITDA, implying a 14% discount to the Electrical subsector. The stock is equally attractive on 2010E EV/Sales of 0.61x vs. our expected clean EBIT margin for the group of 8.2%. Our 12-month price target of €62 is based on an equal weighting of our EV/IC vs. ROIC/WACC model for 2009E and 2010E.

Key risks
SG&A savings could turn out lower than our forecasts, contract execution issues could re-emerge, the macro-environment could prove worse than our estimates assume.