Q: I’ve watched Siemens (NYSE: SI) for some time, but with all the trouble in Europe I’ve been hesitant to buy. However, the company’s shares trade at what seems to be an attractive valuation. Should I start to build a position?

–Elaine Maxie, Charlottesville, VA 

A: Siemens currently trades at around $95 per share, which is well below its 52-week high of $146.74. That may seem like an attractive discount, but it’s important to carefully analyze the company’s fundamentals to ensure that it’s not a value trap. Siemens’ primary challenge is the geography in which it operates. As a major European conglomerate, more than half of the company’s revenue is generated in the region. Both the prospect of a eurozone recession and the region’s austerity measures have crimped sales, causing the firm to post disappointing earnings in the past two quarters. In particular, revenue from the firm’s infrastructure and cities division declined 3.1 percent from the year-ago period. As European cities have been forced to cope with budgetary crises, projects such as rail lines and infrastructure upgrades have been postponed.

Additionally, organic sales in Siemens’ energy division grew by 8.3 percent in its most recent quarter versus the prior-year period, but new orders dropped 11.2 percent due to a decline in spending on renewable energy. Siemens is a key player in solar, hydro and wind power infrastructure applications, so the company has lost revenue as European governments have scaled back their commitments to alternative energy projects. 

Although the lion’s share of Siemens’ revenue is tied to Europe, about a third of revenue is derived from its emerging market operations. China accounts for less than 10 percent of that revenue, so an economic slowdown in the Middle Kingdom shouldn’t have a material impact on Siemens’ earnings.

Siemens is also a growing presence in smart grid and energy efficiency technology. The company recently announced that it was acquiring meter data management outfit eMeter, whose technology enables utilities and consumers to monitor energy usage in real time, allowing for more informed consumption and grid management decisions.

And while revenue from the firm’s industrials segment has weakened in recent quarters, Siemens is still a huge player in the field of industrial automation, which contributes about 20 percent of revenue. Through greater automation, factories are able to produce more products with less labor, improving efficiency and lowering costs. We expect automation to be a major investment theme for several years, as firms seek further ways to cut costs and improve margins. 

Siemens is also striving to improve its own operational efficiency. The company employs 360,000 people, so payroll expenses have long been a significant cost for the company. To that end, management has begun to streamline operations and lay off thousands of workers.

While Siemens isn’t without risk, it currently trades well below its historical price-to-earnings (P/E) and price-to-book (P/B) averages and offers a 3 percent yield. Its shares look attractive for long- term investors. 

Q: Last year, I purchased a commodity exchange-traded fund (ETF) because I thought ETFs were less likely to create a tax liability than mutual funds. But when I received my 1099 from my broker, I noticed the ETF made significant short-term capital gains distributions. Can that be right?

–Mike Gayle, Saginaw, Michigan

A: Although ETFs are usually more tax-efficient than mutual funds, some commodity ETFs pursue strategies that require tremendous portfolio turnover that can accrue short-term capital gains, which must then be passed along to shareholders. These ETFs have portfolios comprised of commodity futures or derivatives, and management often rolls the entire portfolio at regular intervals in order to maintain their strategy. By contrast, there are equity-oriented ETFs that offer exposure to commodities by holding the common stock of firms engaged in their production. These ETFs rarely make either short-term or long-term capital gains distributions. That’s because they’re often passively managed in accordance with a relatively static index, so adjustments to the underlying portfolio are infrequent. 

As long as you take the time to carefully read an ETF’s prospectus and understand its strategy, you’ll avoid such tax surprises in the future.