Siemens Transition From Industrial Giant to High-Tech Player Is Picking Up Steam. The Stock Jumped 6%

The high-tech businesses that German industrial behemothSiemenshas bet its future on performed far better than expected in the most recent quarter, the company said, with exceptional performance in China.

Shares in Siemens shot up 6% on Friday as the market cheered the results, making the stock a standout in a day of trading where the pan-European Stoxx 600 slipped 1%.

The back story.Siemens is aDAXcomponent founded 173 years ago. The largest industrial manufacturer in Europe is a multinational conglomerate in the midst of an ambitious shift to become a cutting-edge player in the fields of digital industry, smart infrastructure, and transportation.

As part of its Vision 2020+ strategy, the company spun off and listed itsenergy divisionin September 2020, the second segment to be split afterSiemens Healthineerslisted in 2018. That left the streamlined group with core businesses in digital industries, smart infrastructure, and mobility.

When it last reported quarterly results in November 2020, analysts got a picture of the success of its digital transformation, with orders and adjusted earnings for its industrial unit outpacing expectations. However, revenue for the group was a disappointment, largely as a result of currency translations as the euro strengthened against the dollar.

The company will see a change in chief executives next month, when Roland Busch takes over from Joe Kaesera 40-year Siemens veteran and its leader since 2013. Busch was chief technology officer of Siemens until September 2020 and is currently the deputy CEO.

Whats new.Siemens said late on Thursday that preliminary results for the first quarter of its financial year the last three months of 2020were significantly higher than consensus expectations, which were provided by the company. Complete and more detailed results will be posted on Feb. 3.

The company said growth was driven by success in the automation and software divisions of its digital industries business, where revenues rose 5% to 3.77 billion ($4.6 billion) in the first quarter, beating the consensus of 3.56 billion.

Adjusted earnings before interest, taxes, depreciation, and amortization (Ebitda) for the business came in at 848 million, with a margin of 22.5%ahead of expectations of 592 million in earnings with a 17% margin. Siemens said digital industries enjoyed higher-than-expected growth in China.

Performance was also strong in the smart infrastructure segment, where orders, revenues, and adjusted Ebitda beat the consensus. While the mobility business logged year-over-year growth in orders and revenue, its earnings came in slightly below expectations.

Looking ahead.The preliminary results from Siemens show that its mammoth pivot away from legacy industry toward a technology-oriented future is picking up steam. And analysts are happy: Swiss investment bankUBSraised its target price for the stock on Friday to 135. The new target price represents a 9% premium to the share price on Thursday, before the preliminary results were released.

A more existential, if less crucial, concern for the companys profitability is exchange rates, though that is obviously outside of Siemens control. The weight of negative currency effects hit revenue in the previous quarter, and investors should watch for mention of that in the detailed results in February. The euro has strengthened 10% against the dollar over the last year, which is consequential for a large European multinational.