Schneider Electric's Demand Tailwinds Likely Extending Into 2022

Wide-moat Schneider Electric's fourth-quarter and second-half 2021 results were modestly ahead of our forecasts, as well as company-provided consensus. Revenue grew by 7% organically, ahead of our 5% forecast. Demand for both divisions was strong with 6%-7% growth. Despite supply chain cost inflation, the 17.3% second-half EBITA margin was down a modest 40 basis points year-over-year organically. The EBITA margin came in 20 basis points ahead of our forecast. 2022 guidance indicates a further 30-basis-point to 60-basis-point expansion. This is above our current forecast but should be achievable with some permanent productivity gains from the ongoing restructuring program. Operating leverage should also continue to be a positive factor in 2022. Management's 7%-9% organic revenue growth guidance is also above our current forecast and supported by a higher-than-usual order backlog, pushing some 2021 orders into 2022. Importantly, the underlying demand momentum remains strong for increased investment in grid distribution products as well as automation solutions. Putting it all together, we expect to increase our fair value estimate by 10%-15%, as a result of forecast adjustments and rolling the model forward.