Company Reports

No-moat Saint-Gobain continued its trend of declining sales, falling 6% on an organic basis during the first quarter. A 1% decrease in selling prices is a concern, and while its price/cost spread remained positive during the quarter, we expect it may eat into its record operating margin achieved during fiscal 2023. During the past two years, price increases for its products have been able to somewhat offset lower demand from a weak construction sector, particularly in Europe, in response to higher interest rates. We attribute the underperformance, compared with narrow-moat Sika and narrow-moat Holcim, which have both reported flat sales growth during their first quarter, to Saint-Gobain’s greater geographic exposure to Europe and its products being more commoditized in nature. We maintain our EUR 68 fair value estimate and view shares as fairly valued.

No-moat Saint-Gobain reported a 1% decline in organic revenue during fiscal 2023, broadly in line with our expectations. The group enters fiscal 2024 with weak momentum as volumes show no signs of improving, declining 5% during the fourth quarter. The group failed to provide much guidance, but anticipates its double-digit operating margin will be maintained, which we believe is certainly attainable. Shares are trading in line with our EUR 68 fair value estimate, which we maintain.

Saint-Gobain has entered into a definitive agreement to acquire CSR, a building products producer in Australia, for an enterprise value of AUD 4.5 billion (EUR 2.7 billion). We believe the likelihood of CSR shareholders accepting the offer is high given the 33% premium, above the one-month volume-weighted average price and 13% premium to our stand-alone AUD 8 fair value estimate for CSR, prior to the announcement. The acquisition is consistent with Saint-Gobain's strategy to be the leader in light construction materials, which are more energy-efficient and easier to install than traditional building materials. The deal will also bolster its geographic presence outside of Europe where the outlook for construction activity remains weak. We maintain our no moat rating and EUR 68 fair value estimate.

Saint-Gobain manufactures and distributes a wide range of building materials, many of which are not entirely synergistic. We cannot fault its strategy of streamlining the company and divesting from businesses where it has not achieved the required scale geographically to compete profitably. Many of the group’s wide range of products don't tend to travel long distances, which tend to make markets very regional and provide minimal benefits to being a global player. The group’s strategy of being a one-stop shop for customers by selling a wide range of construction products is a common theme across the industry and is unlikely to provide a durable competitive advantage.

No-moat Saint-Gobain reported a 10% decline in revenue during the third quarter, of which 3% was organic. Volumes were 5% lower (of which 2% was from fewer working days), which is a less severe decline than 7% in the previous quarter. However, unlike in previous quarters, the benefits from the spillover of higher prices implemented last year were less pronounced and thus were unable to mitigate lower volumes to the same extent as in the past. Nevertheless, a less inflationary environment allowed the group to achieve a positive price-to-cost spread during the third quarter, with management guiding for a record operating margin during 2023, partially benefiting from divestments. Shares are marginally higher but remain undervalued to our EUR 62 fair value, which we maintain.

No-moat Saint-Gobain reported a 1% decline in organic revenue during the second quarter, driven by 7% lower volumes (of which 2% was from fewer working days), a further acceleration from the 5.5% fall in the previous quarter. We aren’t surprised by Saint-Gobain raising its full-year EBIT margin to double digits from between 9% and 11%, which we had already incorporated into our estimates. The spillover effect of price increases already implemented during the previous year, combined with a favorable shift in the group’s product mix due to recent portfolio management, supported a record 11.3% EBIT margin during the first half. We reiterate our EUR 62 fair value estimate and view shares as fairly valued.

No-moat Saint-Gobain reported organic revenue growth of 4.7% during the first quarter, entirely driven by 10.2% pricing growth that offset a 5.5% decline in volumes. Falling energy costs and the rollover impact from last year's price increases supported a positive price-to-cost spread during the quarter. Management confirmed its full-year operating margin guidance of between 9% and 11%, where we think the upper range is more likely, due to a shift in the group's portfolio to higher margin products. We maintain our EUR 62 fair value estimate and view shares as undervalued.

Saint-Gobain has managed to improve the profitability profile of the group through a combination of decentralization and portfolio management actions. Nevertheless, the relatively commoditized nature of its products, inflationary cost pressure and high degree of capital intensity continues to prevent the company from generating significant excess economic profits.

No moat Saint-Gobain exceeded our full-year expectations, reporting record annual revenue and operating profit of EUR 51.2 billion and EUR 5.3 billion, respectively. Impressive 2022 results were driven by price increases to the tune of 14.6%, which not only supported organic revenue growth of 13.3%, but also fully offset cost inflation of EUR 3 billion versus the prior year. However, higher prices combined with a slowdown in construction activity appears to be weighing on demand, which trended downward throughout the year and declined 3% during the fourth quarter. We expect this trend to continue, which will ultimately filter through to margin pressure. While we plan to revise our top-line estimates for Saint-Gobain’s outperformance in 2022, we don’t anticipate a material change to our EUR 58 fair value estimate, nor our margin outlook, which falls at the midpoint of management’s 2023 EBIT margin guidance between 9% and 11%. Shares are currently fairly valued.

No-moat Saint-Gobain managed to offset significant cost inflation in the third quarter. Price increases to the tune of 15% were the main driver behind the group’s 19.6% revenue growth in the third quarter, which includes 5% of favorable currency movements against the weaker euro. However, unsurprisingly it appears that price increases are beginning to weigh on volumes, which were down 1.6% during the quarter. While management raised its inflationary expectation for the full year to above EUR 3 billion, the group has maintained its guidance of operating profit growth for the full year, implying a favorable price/cost spread (price increases will compensate for higher inflation). We maintain our EUR 58 fair value estimate and view shares as undervalued.

No-moat Saint-Gobain raised prices on its building materials by 15% during the first half of 2022, which offset the impact of energy and raw material inflation to deliver record first-half results. Approximately 80% of the group's energy bill is hedged for 2022 so price increases have significantly boosted the bottom line, which helped Saint-Gobain achieve a positive price-over-cost spread and like-for-like profit growth of 11%, at a record EBIT margin of 11%. While the company expects raw material and energy inflation to increase by EUR 3 billion (above their initial expectations of EUR 2.5 billion), most notably due to rising gas prices, management is confident its pricing actions will protect profitability and have not changed profit guidance. Our forecasts remain mostly unchanged, and we maintain our EUR 58 fair value estimate. Shares appear undervalued

No-moat Saint-Gobain grew revenue by 18.4% in the first quarter, driven by a 14.5% increase in prices, which helped to offset raw material and energy cost inflation. The group has 80% of its energy bill hedged for 2022 so price increases have a significant impact on the bottom line and thus the group’s positive price-over-cost spread in the first quarter. Guidance of full-year operating income growth was maintained by management and is in line with our forecasts. Volumes were positive in the quarter despite the significant price hikes. However, we believe further price increases, which are required to maintain current profitability will begin to have an impact on demand, given macroeconomic worries and the threat of consumers becoming stretched. Management expects raw material and energy inflation of EUR 2.5 billion, which will require a 10% price increase for the full year to support profitability. We reiterate our EUR 58 fair value estimate and view shares as fairly valued.

European building material manufacturers have reversed any share price gains they had made year to date since Russia invaded Ukraine on Feb. 24. While the direct exposure to both Russia and Ukraine is no more than 1% across our coverage, the energy-intensive manufacturing process (most notably for cement) has spooked investors due to rising energy prices as Russian supplies of critical oil, gas and coal are shunned. Although it is too early to comment on the sustainability of recent commodity price movements, we believe narrow-moat CRH, HeidelbergCement and Holcim will be able to manage higher energy prices without us needing make significant changes to our fair value estimates. The sector is undervalued with an average price/fair value ratio of 0.79 on March 8.

Saint-Gobain has managed to improve the profitability profile of the group through a combination of decentralization and portfolio management actions. Nevertheless, the relatively commoditized nature of its products, inflationary cost pressure and high degree of capital intensity continues to prevent the company from generating significant excess economic profits.

No-moat Saint-Gobain’s full-year results broadly met our expectations in what can be described as a transformational year for the group, which saw 37 acquisitions completed. Price increases to the tune of 6.7% more than offset inflationary cost pressures, which combined with fixed-cost savings and portfolio management helped Saint-Gobain deliver double-digit EBIT margins for the first time in its history. Organic revenue grew 18.4% for the full year and exceeded 2019 levels by 13.8%, with higher volumes being driven by renovation activities in Europe and a robust residential market in North America. However, group volumes in the second half grew by a modest 0.6% against a tougher comparative. We believe 2022 will be more challenging for the group as raw material and energy inflation is likely to persist (despite energy hedging strategies), which will require even further price hikes to maintain current profitability and consumers becoming more stretched. We don’t anticipate materially changing our EUR 54 fair value estimate.

No-moat Saint-Gobain was able to offset raw material and energy inflation by increasing prices 8.7%, which led to group organic revenue growth of 9.4% in the third quarter. We believe macroeconomic factors such as a robust construction and renovation market, combined with labor shortages, facilitated price increases sticking rather than sustainable pricing power. Profit guidance for the second half of the year was maintained, which implies group profits and margins will reach an all-time high. We had already incorporated the favorable outlook in our forecasts and reiterate our EUR 54 fair value estimate. Shares are fairly valued.

Saint-Gobain has managed to improve the profitability profile of the group through a combination of decentralization and portfolio management actions. Nevertheless, the relatively commoditized nature of its products and high degree of capital intensity will continue to prevent the company from generating significant excess economic profits.

We raise our fair value estimate for no-moat Saint-Gobain to EUR 54 from EUR 50 after reviewing the group’s new medium-term financial targets set at its Capital Markets Day. We believe the group’s margin profile and cash flow generation capabilities have improved following a combination of portfolio optimization and more locally focused operating model. A leaner business will enhance the group’s profitability, on top of the strong demand Saint-Gobain is anticipated to enjoy due to higher renovation activity driven by government stimulus aimed at making buildings more energy efficient. Shares are currently trading in line with our revised fair value estimate.

Saint-Gobain has managed to improve the profitability profile of the group through a combination of decentralization and portfolio management actions. Nevertheless, the relatively commoditized nature of its products and high degree of capital intensity will continue to prevent the company from generating significant excess economic profits.

No-moat Saint-Gobain continues to benefit from a strong construction market driving first-half sales volumes 23% higher than the prior period and 8% above prepandemic 2019 levels. A sharp recovery in sales volumes combined with portfolio optimization resulted in record operating margins in the first half of 2021, which exceeded our expectations.