Siemens profit warning sends a shiver

Wednesday, March 19, 2008

(FT) Siemens, Europe’s largest engineering group, shed €12.5bn ($19.7bn) in market capitalisation Monday after a shock €900m profit warning led to fears that the crisis in financial markets could be creeping into industrial companies.

The German conglomerate blamed a contract cancellation, project delays and capacity issues for the warning – all issues that investors are nervously eyeing. But Siemens said the subprime crisis was having no impact on its business, a line backed up by other industrial groups such as Linde, the world’s largest industrial gases group.

Analysts said the bad news was “Siemens-specific”, while one top investor said it left the credibility of Peter Löscher, chief executive since July, “hanging by a thread”.

James Stettler, an analyst at Dresdner Kleinwort, said: “His honeymoon is over.”

The warning follows a wave of bad news from the German group, which has been embroiled in a €1.3bn bribery scandal that has damaged its image worldwide.

Mr Löscher was brought in to clean up the company in July and had been credited with working well until now.

The profit warning stems from a group-wide review ordered by Mr Löscher after a number of unpleasant surprises in previous quarters from large projects. The €600m shortfall in profits at its power generation unit, €200m in transport and €100m in IT will all but wipe out profits in the second quarter, according to a consensus of analysts.

Mr Löscher said he felt “confirmed” by the warning – even as the company’s shares closed down 17 per cent, valuing the group at about €60bn.

“We are working through the past. Those who are now responsible weren’t then,” he said.

Mr Löscher said the €900m was the biggest part of any writedowns from the review but he did not deny there could be more.

He refused to state any targets for the full year until second quarter results at the end of April, when he will also present a plan to cut administrative costs by €1.2bn-€2.4bn.

Some investors fear that programme could be watered down and that further losses could come from a nuclear power contract in Finland. Siemens confirmed its mid-term profitability targets for 2010.

Mr Löscher used the fall to buy €3.3m in shares and Mr Kaeser bought €200,000 worth.

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