What's going on?
Siemens, Europe’s largest industrial manufacturer, delivered iron-clad second-quarter results on Wednesday – and its stock hammered up 5%.
What does this mean?
Siemens surpassed analyst estimates, delivering sales that were 4% higher than the same quarter last year. The German industrial powerhouse also saw its future orders chug 6% higher, thanks to a number of large contract wins – including an $850 million order from America’s Amtrak to manufacture, deliver, and service diesel-electric trains.
Profit in the company’s core industrial business was 6% higher than this time last year. Profit overall, however, fell – but that was largely due to a prior one-off benefit making last year’s profit abnormally high.
Why should I care?
For markets: Don’t follow in General Electric (GE)’s footsteps.
Siemens said on Tuesday that it’ll spin off its struggling gas and power unit – which may help the company avoid going the way of rival US conglomerate GE, whose stock has plummeted 65% over the last two years. GE’s fall from grace was precipitated by worries that the conglomerate way of working just doesn’t cut the mustard anymore – too many businesses under one roof can be prone to leaks. And chopping through two CEOs and cutting its dividend twice during that period (to a single penny) hasn’t helped GE convince investors otherwise. By spinning off gas and power, Siemens should be able to focus its attention on more profitable parts of the company – and the sale could provide a helpful cash boost.
The bigger picture: Spinoffs get value turning.
A “conglomerate discount” – where the value of a whole firm falls short of the sum of its individual parts – has been known to befall big, diversified companies like Siemens, resulting in stock prices that seem to deliberately lowball the value of a company’s assets. With a successful 2018 spinoff of its Healthineers business under its belt, Siemens will likely be trigger-happy to cut its gas and power unit – and hopefully see its stock price rise.