Company Reports

Narrow-moat Legrand reported a 5% decline in organic sales during the first quarter, a bigger drop than the 3% decline expected by company-compiled consensus, which sent shares 4% lower intraday. A weak building sector, which accounts for 80% of its revenue, was the primary reason for the decline and its underperformance against electrical peers, while sales to data center customers have not grown at the same pace as some of its peers. Full-year 2024 guidance of low-single-digit revenue growth, including acquisitions, and an adjusted operating margin of between 20% and 20.8% was kept unchanged. We believe its capital goods peers ABB, Schneider Electric, and Siemens offer investors a better growth outlook. We reiterate our EUR 87 fair value estimate and view shares as fairly valued.

Legrand has established itself as a dominant player in electrical equipment, enjoying a leading market share in two thirds of its product ranges. Its brand reputation for reliability and extensive product range has created close-knit relationships with the key participants in the sales channels, creating high barriers to entry and resilient profitability. While the majority of its products are sold via major distributors, the key decision-makers in electrical equipment are electricians, who act on behalf of the end user. Legrand’s push-pull strategy reinforces its close relationships with stakeholders by offering distributors an extensive product range of over 300,000 products and frequent training on its regular product innovations to installers, who are largely insensitive to price and who value reputation and ease of installation above price.

Narrow-moat Legrand delivered a record operating margin of 21%, evidence of its strong pricing power, despite declining demand from its residential and commercial buildings end markets. Organic sales grew 2.7% during fiscal 2023, in line with company-compiled consensus of 3.0%. Full-year 2024 guidance of sales growth in the low single digits (including acquisitions) and an adjusted operating margin of between 20.0% and 20.8% is consistent with our forecasts. Shares are currently trading slightly above our EUR 87 fair value estimate, which we maintain.

Having recently raised its organic revenue guidance in the previous quarter to between 3% and 6%, it was somewhat disappointing to see management guide for the low end to be achieved during the full year. Third-quarter organic sales growth of 2% was considerably lower than comparable segments at ABB and Schneider. Legrand’s large exposure to residential and commercial office construction, which are more sensitive to higher interest rates, means its top-line performance has lagged peers. Mid-single-digit volume declines in the U.S. more than offset sequential improvements in Europe, which can largely be attributable to Legrand’s exposure to a weak U.S. residential and office market. We have cut our organic sales growth estimate to 2.9% from 4.6% due to the underperformance of its Americas segment but maintain our EUR 87 fair value estimate. Legrand’s narrow moat remains firmly intact as evidenced by its impressive operating margin, which was guided upward for the full year. Shares are currently fairly valued.

Legrand has established itself as a dominant player in electrical equipment, enjoying a leading market share in two thirds of its product ranges. Its brand reputation for reliability and an extensive product range have created close-knit relationships with the key participants in the sales channels, creating high barriers to entry and resilient profitability. While the majority of its products are sold via major distributors, the key decision-makers in electrical equipment are electricians, who act on behalf of the end user. Legrand’s push-pull strategy reinforces its close relationships with stakeholders by offering distributors an extensive product range of over 300,000 products and frequent training on its regular product innovations to installers, who are largely insensitive to price and who value reputation and ease of installation above price.

Narrow-moat Legrand managed to raise prices by more than we had expected during the second quarter, which combined with slightly lower raw material costs, were the primary drivers behind its organic revenue growth of 2% and operating profit margin expansion of 170 basis points to 22.3% during the second quarter. The fact that price increases continue to stick, despite weakness in certain end markets, highlights the high value and low cost of its products and also Legrand's close relationships with distributors and installers. Similar to its peers ABB, Siemens, and Schneider Electric, who already raised sales and profit guidance this year, Legrand has lifted the midpoint of its organic revenue growth guidance to 4.5% from 1% while it also increased its full-year operating margin target by 0.5% to 20.5%. While we adjust our organic revenue growth estimate to 4.2% from 2.6% during fiscal 2023 due to stronger-than-expected pricing, we maintain our EUR 87 fair value estimate. Legrand’s large exposure to residential and commercial office buildings, which are more sensitive to higher interest rates, means its top-line outlook is significantly lower than peers. Shares are fairly valued.

Legrand has established itself as a dominant player in electrical equipment, enjoying a leading market share in two thirds of its product ranges. Its brand reputation for reliability and an extensive product range have created close-knit relationships with the key participants in the sales channels, creating high barriers to entry and resilient profitability. While the majority of its products are sold via major distributors, the key decision-makers in electrical equipment are electricians, who act on behalf of the end user. Legrand’s push-pull strategy reinforces its close relationships with stakeholders by offering distributors an extensive product range of over 300,000 products and frequent training on its regular product innovations to installers, who are largely insensitive to price and who value reputation and ease of installation above price.

We increase Legrand’s fair value estimate to EUR 87 from EUR 84 after taking a fresh look at the business. Raising our anticipated average five-year adjusted EBIT margin to 20.5% from 20.1% is the biggest driver behind our higher fair value. We expect Legrand to maintain its 2022 EBIT margin of 20% despite a weak near-term outlook for its residential market (40% of sales), through strong pricing power and lower raw material costs. We maintain Legrand’s narrow moat rating and view shares as fairly valued.

Legrand has established itself as a dominant player in electrical equipment, enjoying a leading market share in two thirds of its product ranges. Its brand reputation for reliability and an extensive product range have created close-knit relationships with the key participants in the sales channels, creating high barriers to entry and resilient profitability. While the majority of its products are sold via major distributors, the key decision-makers in electrical equipment are electricians, who act on behalf of the end user. Legrand’s push-pull strategy reinforces its close relationships with stakeholders by offering distributors an extensive product range of over 300,000 products and frequent training on its regular product innovations to installers, who are largely insensitive to price and who value reputation and ease of installation above price.

Narrow-moat Legrand delivered organic revenue growth of 7% during the first quarter, which was entirely driven by pricing (8% higher year over year), helping to offset marginally lower volumes. Similar to other capital equipment peers, the spillover effect of price increases already implemented also supported margin expansion. Operating margin expansion of 230 basis points to 22.6% from higher pricing reflects the group’s brand reputation and close relationships with distributors and installers, which has allowed its pricing to stick despite a deteriorating macroeconomic environment. While first-quarter operating performance was ahead of management’s expectations, full-year guidance was kept unchanged due to uncertainty in the outlook for its end markets (which is heavily weighted towards residential and office buildings) and limited backlog visibility. We maintain our EUR 83 fair value estimate and view shares as fairly valued.

Legrand is well positioned to take advantage of growth in building and home automation and energy saving systems. The heart of Legrand’s product portfolio is a full suite of components necessary to supply electricity to a building or home, as well as front-of-the-wall peripherals. Building and home automation essentially deploys systems using software and control panels to link up lighting, power, audio, heating, and air conditioning, as well as appliances and other machines, to be centrally controlled by a user from a control panel, an iPad, or another wireless device.

Legrand exited 2022 with around 4% more operating income and also higher free cash flow than we forecast, aided by a successful pricing strategy and good working capital management. Guidance for 2023 looks mostly in line with our forecasts. We reiterate our EUR 83 fair value estimate and narrow moat rating. Shares look fairly valued.

Legrand posted a solid third quarter; however, it also indicated likely negative volume growth in the fourth quarter by sticking to a full-year 2022 6%-9% organic revenue growth. The firm booked 10% organic growth in the first nine months but mainly from price increases. The carry over from the progressively higher price increases in the first three quarters could be around 10% in the fourth quarter, which means that even at the 9% upper end of 2022 guidance, management expects negative volume growth in the fourth quarter. This is not surprising to us. We have been expecting a slowdown and factored in less than 2% organic growth in 2023. We think Legrand has some defensiveness against a general economic slowdown as the product portfolio does not consist of a lot of discretionary items. Electrical components that can save energy or back up power supply equipment will continue to be in demand even if on a more normalized level. We maintain our narrow moat rating and EUR 83 fair value estimate. Shares look attractive.

Legrand is well positioned to take advantage of growth in building and home automation and energy saving systems. The heart of Legrand’s product portfolio is a full suite of components necessary to supply electricity to a building or home, as well as front-of-the-wall peripherals. Building and home automation essentially deploys systems using software and control panels to link up lighting, power, audio, heating, and air conditioning, as well as appliances and other machines, to be centrally controlled by a user from a control panel, an iPad, or another wireless device.

Legrand is well positioned to take advantage of growth in building and home automation and energy saving systems. The heart of Legrand’s product portfolio is a full suite of components necessary to supply electricity to a building or home, as well as front-of-the-wall peripherals. Building and home automation essentially deploys systems using software and control panels to link up lighting, power, audio, heating, and air conditioning, as well as appliances and other machines, to be centrally controlled by a user from a control panel, an iPad, or another wireless device.

Legrand's first-half revenue grew by 11%, boosted by price increases of around 9% and just under 2% volume growth. All regions posted strong growth. We raise our fair value estimate to EUR 83 per share from EUR 75, adjusting for better-than-expected prices than we had anticipated. Management upgraded its full-year organic revenue guidance to 6%-9%; however, still implying lower growth in the second half. We will not be surprised by a lower second half given the incredible pace of pricing that drove the first half. We see a positive long-term demand picture for the business. We think further government and self-directed green initiatives will result in more building developers and owners selecting energy-saving products, even at a premium. Datacenters (contributing around 15% of group revenue including the most recent acquisitions) should also support demand for energy-saving products. Broadly, we expect a faster replacement cycle of the company's core low- and medium-voltage components into connected or smart technology versions that will be used in combination with building energy management software to lower building energy consumption. We think that even in a downturn this would not be discretionary spending given energy inflation and sustainability initiatives. We note that demand for green products remained strong in the quarter. Our narrow moat rating remains intact.

Legrand is well positioned to take advantage of growth in building and home automation and energy saving systems. The heart of Legrand’s product portfolio is a full suite of components necessary to supply electricity to a building or home, as well as front-of-the-wall peripherals. Building and home automation essentially deploys systems using software and control panels to link up lighting, power, audio, heating, and air conditioning, as well as appliances and other machines, to be centrally controlled by a user from a control panel, an iPad, or another wireless device.

Inflation was a key driver behind Legrand's first-quarter results with the company managing to push through a nearly 8% average price increase and keeping margins at 20% despite a 100-basis-point year-over-year decline from an 18% rise in raw material and component costs. As a result, price was the key driver to 11% organic growth with underlying 3% volume growth. Given strong revenue growth printed in the first quarter, the company is still likely to reach full-year growth within it's 3%-7% target, but we think the high end will be challenging. Like other companies in our European capital goods coverage, we believe inflationary headwinds will weigh more heavily in the coming quarters with customers starting to make trade-offs between nice-to-have and must-have purchases, and suppliers continuing to have outsize bargaining power due to supply chain tightness. That said, we see rising power prices and sustainability goals providing some underlying support for the company's product portfolio. Buildings alone contribute 28% indirectly and directly to greenhouse gases. We maintain our narrow moat rating and EUR 75 fair value estimate.

Legrand posted full-year 2021 results in line with our forecasts and company-provided consensus. Strong demand drove the nearly 14% organic revenue growth, the profit margin continues to be solid at 20.5%. Europe and rest of world regions both posted 17% growth, above the group average; while North and Central America grew organically by 8%. On a country level, China and India grew by double digits, and in the Europe region, France and Italy posted strong demand. All three regions enjoyed favorable year-over-year comparisons with 2020 revenue down 8%-10% for each. The company also booked 3% acquisition-related growth, as part of its ongoing roll-up strategy of the fragmented competitor landscape. We incorporate this strategy into our forecasts with close to 8% annual medium-term revenue growth, which includes around 5% organic revenue growth and just below 3% acquisition growth. While acquisitions often lead to modest margin dilution of around 30 basis points per year, we expect operating profit margins annually to remain at around 20%. Legrand products' leading positions with technicians and distributors supports pricing power. We are maintaining our EUR 75 fair value estimate and narrow moat rating.

Narrow-moat-rated Legrand posted a decent third quarter in line with our expectations. We have made minor adjustments to our 2021 forecasts with a slight increase in organic growth to 12%. Management expects 2021 organic growth of 11%-13%, with the low end factoring in supply chain disruptions holding back revenue. Our forecast changes do not have a material impact on our fair value estimate.