Forced to seek a government rescue barely a year ago, Siemens Energy AG was an unlikely candidate for Europe’s best performing stock of 2024. The fact that a General Electric Co. spinoff, GE Vernova Inc., unwittingly assisted its rival’s resurrection is even more remarkable. Yet the more investors compare the two electrical power-equipment giants, the more the German firm should benefit.
Spun out of Siemens AG in 2020, Siemens Energy was forced to ask Berlin for financial guarantees in 2023 following quality problems and massive losses at its wind unit. From that nadir, the stock price has since increased around sevenfold as investors bet the wind issues won’t require a dilutive recapitalization and began paying more attention to the company’s gas turbine and power-grid activities, which are benefiting from rising electricity demand. This year’s 300% price gain exceeds that of any other member of the Stoxx Europe 600 index.
The group boasts a giant €123 billion ($129 billion) order book, but Siemens Energy’s strengths might have gone unnoticed were it not for GE spinning off its own energy activities into a separately listed company in April. GE Vernova is benefiting from the same power demand trends — which are partly linked to the boom in data centers to enable artificial intelligence — and its stock has more than doubled in nine months. When hedge funds compared the pair, the German peer appeared very undervalued. And maybe it still is.
Siemens Energy’s stock market debut during the early part of a global pandemic was inauspicious: the gas and power activities appeared to be low-growth and were barely profitable, triggering significant restructuring. Things soon got much worse: In 2022, Siemens Energy agreed to pay €4 billion to purchase the roughly one-third of shares in power subsidiary Siemens Gamesa it didn’t already own.
But the wind unit hadn’t sufficiently taken into account the risk of inflation when pricing contracts, and had neglected reliability in its hurry to develop larger, more powerful onshore wind turbines; the cost of rectifying blade and bearing problems contributed to a €4.5 billion net loss in fiscal 2023. The wind division continues to lose more than €400 million per quarter and isn’t expected to break even until 2026.
After pausing sales of the two problematic onshore designs, Siemens Gamesa has its work cut out to convince customers the equipment is reliable. The second coming of Donald Trump – no fan of wind power – isn’t encouraging.
But in hindsight, investors may have overreacted to headlines describing the rescue as a government bailout. Siemens Energy didn’t require taxpayer money per se; the main problem was banks weren’t willing to underwrite its large, multiyear contracts. Berlin ended up providing counter-guarantees, while former parent Siemens chipped in a couple of billion euros by purchasing a stake in an Indian joint-venture from Siemens Energy.
While on a group-wide basis Siemens Energy only expects to roughly break-even next year, after reporting a profit in fiscal 2024 on disposal gains, the group’s medium-term prospects look much rosier.
Compound annual revenue growth may exceed 10% over the coming three years, while the company aims to achieve an adjusted profit margin of between 10% and 12% in 2028 compared with previous expectations of 8% or above, according to an updated forecast published last month.1
The increased demand for power isn’t just because of AI: Trends like population growth, rising temperatures (spurring demand for air conditioning) and electric vehicles will require a lot more electrons. Heralding a new “age of electricity,” the International Energy Agency says global electricity consumption could grow six times faster than total energy demand until 2035. Meanwhile, 2024 is expected to be the first year that global utilities spent more on capex than the oil and gas industry, according to GE Vernova.
Spurred also by the shift away from burning coal and oil and the need to ensure electricity supply continuity on dark, windless days, the gas turbine market is returning to growth. Industry-wide turbine orders are on track for their best year since 2015, notes Morgan Stanley analyst Max Yates. Limited production capacity is positive for pricing, while long-term maintenance contracts are highly lucrative.
Demand for transmission equipment is increasingly even more rapidly, due to industrialized countries replacing aging transformers and switchgear, and connecting new wind and solar power to the grid.
Revenue at Siemens Energy’s grid technology unit grew by around one-third in fiscal 2024, with an increase of around one-quarter expected in the coming year. The division is planning to hire thousands of new staff — a notable commitment when many German firms are scaling back.
Thanks to customer prepayments, plus proceeds from the India disposal, the group has already swung back to a net cash position. But the terms of its government rescue currently prevent the firm from paying dividends: so it’s likely to try to unhook itself from that support as quickly as possible.
This divergence in capital returns — earlier this month GE Vernova announced a modest dividend and up to $6 billion of share buybacks — is one reason why investors tend to favor the US company. While GE Vernova’s wind unit has also been losing money after offshore turbines suffered blade failures, it’s not been as big a disaster as Siemens Gamesa. The upshot is that GE Vernova’s market capitalization is more than twice as large its German rival’s even though both companies have similar revenue.
European investors have become wearily accustomed to US firms fetching a giant premium. And it’s fair to say both companies trade on very high multiples of near-term earnings.
Still, Siemens Energy’s massive equipment and service order backlog provides a decent visibility on future earnings. If shareholders can gain more confidence the wind reliability issues are truly in the past, its breakout year could turn out to be more than a flash in the pan.
1 Siemens Energy provided a revenue growth range of high single-digit to low double-digit. Profit margin is earnings before interest, tax, amortization and goodwill impairments.
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