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On May 9, Zacks Investment Research downgraded industrial goods manufacturer Siemens AG to a Zacks Rank #3 (Hold) from a Zacks Rank #2 (Buy) on the heels of downward estimate revisions due to relatively modest second-quarter fiscal 2014 results.

Despite the downtrend, the company still has the potential to drive the stock up. The stock is currently trading at a forward P/E of 14.5x with long-term growth expectations of 11.8%.

Why the Downgrade?

Siemens reported a net income of €1,153 million ($1,579.8 million) or €1.32 per share ($1.81), up from €1,030 million ($1,411.3 million) or €1.18 per share ($1.62) in the year-earlier quarter. Although earnings increased year over year, it failed to meet the Zacks Consensus Estimate of $1.87.

Total revenue in the reported quarter decreased 2% year over year to €17,449 million ($23,908.6 million), primarily due to a lower volume from large orders. Orders declined 13% year over year to €18,430 million ($25,252.8 million) due to higher orders in the year-ago quarter.

Over the last 7 days, most of the earnings estimates for Siemens have been revised downward for fiscal 2014 and fiscal 2015. This seems to be an aftereffect of a slightly bearish outlook for the ongoing fiscal. The company expects markets to remain challenging in fiscal 2014 with recovery in short-cycle businesses occurring in the latter half of the fiscal.

The downward earnings estimates are largely due to uncertainties in the current macroeconomic environment, which can adversely affect the company’s earnings growth as well as margins.

In addition, raw material inflation, higher R&D expense and increasing competition are some of the other concerns. Siemens’ growth objectives also depend on market timing and acceptance of new product offerings, including its ability to continually refresh its product suite and bring those to the market at acceptable price points. This makes Siemens vulnerable to market risks. The company also faces fierce local competitive pressure, specifically in the emerging markets. Establishing local operations are likely to hurt its profitability to some extent due to continuous investments in value drivers that will help offset competition.

Other Stocks to Consider

Other stocks that look promising and are worth reckoning include GrafTech International Ltd. (GTI - Snapshot Report), Universal Electronics Inc. (UEIC - Snapshot Report) and Garmin Ltd. (GRMN - Analyst Report). While GrafTech and Universal Electronics carry a Zacks Rank #1 (Strong Buy) each, Garmin carries a Zacks Rank #2 (Buy).

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