Company Reports

Wide-moat Schneider Electric delivered impressive 5% organic revenue growth during the first quarter, reaffirming the group’s long-term structural growth drivers. Its outperformance against company-compiled consensus and its peer ABB, which reported earnings on April 18, can be attributable to its systems business, which grew by double digits due to strong growth from its data center and infrastructure end markets. We view Schneider as an enabler of several structural megatrends, such as the necessary upgrade of grid infrastructure to support decarbonization initiatives as well as investment into artificial intelligence, underpinning its robust top-line outlook and the increase in our fair value estimate to EUR 195 from EUR 174. Shares are trading at a 9% premium to our revised fair value estimate.

Schneider Electric is well positioned for the ongoing convergence of electrical hardware and software markets. Its portfolio of electrical power and industrial automation products exhibits high barriers to entry and will benefit from the secular trends of digitalization, the energy transition and reshoring production, supporting long-term structural growth. Several acquisitions have expanded Schneider’s digital capabilities, leveraging its leading market share in electrical products to further integrate itself with end users’ operations and create more meaningful relationships with customers. The shift away from purely transactional sales toward stickier digital revenue and its continuous focus on productivity improvements has lowered the cyclicality of operating performance.

Wide-moat Schneider Electric outperformed expectations during fiscal 2023 and guided for growth ahead of peers in fiscal 2024, justifying why it is trading at a premium multiple relative to its peers. Organic revenue grew 12.7% during the full year, the upper end of its upgraded guidance and beating company-compiled consensus of 12.2%. Guidance for fiscal 2024 organic revenue growth between 6% and 8% and operating profit growth between 8% and 12% exceeds its capital goods peers, reflecting the attractive outlook for several of Schneider’s end markets. Shares are trading at a slight premium to our EUR 174 fair value estimate.

The U.N. Climate Change Conference, otherwise known as COP28, has reiterated the secular growth theme underpinning our recently upgraded forecasts for the capital goods manufacturers. Combating climate change requires upgrading electricity grids to accommodate renewable energy and greater adoption of energy-management solutions for energy-intensive infrastructure, such as buildings and data centers. Wide-moat Schneider Electric is best positioned, in our view, and is trading at a slight discount to our recently revised EUR 174 fair value estimate.

During the past decade, wide-moat Schneider Electric’s strategy has focused on expanding its digital capabilities, which have advantageously positioned the group to capitalize on several secular growth themes. Rising investment in critical infrastructure (electrical utilities and data centers) required to support multiyear megatrends and a shift in revenue mix toward higher-margin software and services, underpin the group’s lofty expectations set at its capital markets day. It has guided for annualized revenue growth between 7% and 10% and EBITA margin expansion of 200 basis points during the next 4 years. Given a gloomy macroeconomic environment backdrop, we estimate the low end of its target reflects a more likely base case. Nevertheless, we raise our fair value estimate to EUR 174 from EUR 168 to reflect Schneider’s strong market position in fast-growing end markets. Shares appear slightly undervalued.

Schneider Electric is well positioned for the ongoing convergence of electrical hardware and software markets. Its portfolio of electrical power and industrial automation products exhibits high barriers to entry and will benefit from the secular trends of digitalization, the energy transition and reshoring production, supporting long-term structural growth. Several acquisitions have expanded Schneider’s digital capabilities, leveraging its leading market share in electrical products to further integrate itself with end users’ operations and create more meaningful relationships with customers. The shift away from purely transactional sales toward stickier digital revenue and its continuous focus on productivity improvements has lowered the cyclicality of operating performance.

Wide-moat Schneider Electric reported 11.5% organic revenue growth during its third quarter, marginally exceeding company-compiled consensus of 10.9%. Schneider is well positioned for secular growth themes, such as the energy transition and digitalization, which formed the foundation of its 23% organic revenue growth in systems and backlog growth, most notably from data center and electric utility end markets. Full-year guidance of organic revenue growth between 11% and 13% and adjusted EBITA growth of between 18% and 23% were both confirmed. The share price is largely unmoved and remains undervalued to our unchanged EUR 168 fair value estimate. We expect the shift away from short-cycle transactional product sales toward stickier digital revenue and the company’s continuous focus on productivity improvements to support higher profitability than in the past.

We raise our fair value estimate for Schneider Electric to EUR 168 from EUR 160 and maintain its wide moat rating after taking a fresh look at the business. Several acquisitions have expanded Schneider’s digital capabilities, leveraging its leading market share in electrical products to further integrate itself with end users’ operations and create more meaningful relationships with customers. The shift away from purely transactional sales toward stickier digital revenue and its continuous focus on productivity improvements have lowered the cyclicality of the business and support our five-year average 18.6% EBITA margin assumption, an increase from 18.2%. The market is correctly placing a premium multiple on Schneider due to its attractive outlook and its superior free cash flow generation to peers. Shares appear fairly valued.

Schneider Electric is well-positioned for the ongoing convergence of electrical hardware and software markets. Its portfolio of electrical power and industrial automation products exhibit high barriers to entry and will benefit from the secular trends of digitalization, the energy transition and reshoring production, supporting long-term structural growth. Several acquisitions have expanded Schneider’s digital capabilities, leveraging its leading market share in electrical products to further integrate itself with end users’ operations and create more meaningful relationships with customers. The shift away from purely transactional sales toward stickier digital revenue and its continuous focus on productivity improvements have lowered the cyclicality of operating performance.

Wide-moat Schneider Electric delivered impressive first-half results, growing organic revenue and EBITA by 15% and 29%, respectively. Price increases of 9%, mostly consisting of actions taken in the prior year to offset inflation, were the main driver behind the strong print. Despite good execution of its backlog, the group’s order book continues to grow to record levels and offers over 6 months' visibility, enabling management to raise the midpoint of its full-year revenue and EBITA guidance by 0.5% and 2%, respectively. Solid volume growth in the current uncertain economic environment displays the high-value nature of Schneider’s products and solutions. While we plan to revise our estimates for Schneider’s better-than-expected first-half EBITA margin, we don’t expect to meaningfully change our EUR 160 fair value estimate, which is where shares are currently trading at.

Wide-moat Schneider reported organic revenue growth of 16% during the first quarter, benefiting from the spillover of price increases implemented last year and easing of supply chain constraints helping an accelerated execution of the group’s record backlog. We expect pricing to remain stable throughout the year supported by the mission-critical nature of the group’s product and software offering, which will support double-digit revenue and EBITA growth. A record backlog at the end of the first quarter and deceleration of inflation has led management to raise its full-year organic EBITA growth guidance to between 16% and 19% (from 12% and 16%), which translates to an adjusted EBITA margin of around 17.6% and 17.9%. Our estimates had largely baked a strong outlook into account, and thus we maintain our EUR 160 fair value estimate. Shares appear fairly valued.

We believe Schneider Electric’s software strategy offers competitive advantages and should add revenue visibility and returns stability. While stand-alone software sales composes around 10% of the group total on our estimates, they support sales for other products and increase customer retention, as the software systems are deeply integrated with end users’ operations. They also provide recurring revenue through licensing fees. We expect software sales to outgrow the group and increase as a portion of revenue over the medium term.

We believe Schneider Electric’s software strategy offers competitive advantages and should add revenue visibility and returns stability. While stand-alone software sales composes around 10% of the group total on our estimates, they support sales for other products and increase customer retention, as the software systems are deeply integrated with end users’ operations. They also provide recurring revenue through licensing fees. We expect software sales to outgrow the group and increase as a portion of revenue over the medium term.

We increase our fair value estimate for Schneider Electric to EUR 160 per share from EUR 150 per share, based on the time value of money and increasing our medium-term assumptions. Our 2023-27 average organic revenue growth forecast increases modestly to just over 6%, with a more favorable view on medium-term structural growth drivers. The company exited 2022 with a strong backlog of orders, which will support revenue growth in 2023. At the end of fourth-quarter 2022, the company had a backlog equivalent to six months of revenue. This is almost twice the size of its historic backlog rates, which means management has an unusually high level of visibility on 2023 revenue. As such, we have also increased our 2023 revenue growth forecast to nearly 10% on an organic basis, up from low single digits. We expect positive pricing on the backlog as well as some productivity gains to expand the adjusted EBITA margin by 20 basis points to 17.8% in 2023. We maintain our wide moat rating.

Schneider Electric reported solid third-quarter revenue growth of 12% across energy management and automation products, and maintained guidance for the year. We maintain our wide moat rating and EUR 150 fair value estimate. Based on comments we have heard so far this earnings season from European Capital Goods' management, we expect Schneider Electric and other companies exposed to the European residential buildings market to see slower growth in 2023. That weakness is not a surprise and has been in our forecast—we have just 2% growth baked into our 2023 revenue forecast for Schneider. European consumers are losing steam in spending power in the face of extraordinary inflation, particularly on energy prices and therefore a near-term spending slowdown across most product categories is looking more likely. Roughly 15%-20% of Schneider Electric's revenue comes from more cyclical-driven revenue, related to data center capital expenditure and the residential electrical component market globally.

Strong product category demand and good execution lead to another strong quarter for Schneider Electric as well as an increase in management guidance for the year. Divisionally, the energy management division continues to be the stronger performer on growth and profitability. Group revenue grew by 10% organically with pricing as a stronger contributor than volume. Energy management grew by nearly 11% organically in the first half while the smaller industrial automation division grew by nearly 8%. We believe the above cycle growth rates are driven by a mix of temporary catch-up demand but also long-term structural drivers, these include lower energy consumption and higher automation adoption across sectors, and we reflect these tailwinds in our 5% medium-term revenue forecast growth rate. Management moderately raised its full-year forecasts. We expect to make modest changes to our near-term forecasts but do not expect them to materially impact our EUR 150 fair value estimate. We maintain our narrow moat rating.

Schneider Electric's first-quarter revenue growth beat company provided consensus. While margins are only reported semiannually, encouragingly, the company confirmed that it expects a net positive price contribution and margin expansion at the group level this year, in spite of inflationary pressures. We maintain our wide moat rating and EUR 150 fair value estimate. Shares offer modest upside from current levels.

We believe Schneider Electric’s software strategy offers competitive advantages and should add revenue visibility and returns stability. While stand-alone software sales composes around 10% of the group total on our estimates, they support sales for other products and increase customer retention, as the software systems are deeply integrated with end users’ operations. They also provide recurring revenue through licensing fees. We expect software sales to outgrow the group and increase as a portion of revenue over the medium term.

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.

Schneider Electric posted solid third-quarter organic growth with a mix of fundamental demand, price increases and possibly some redundancy in customer orders leading to 9% growth. Group revenue beat our forecast by around 3%; however, given the supply chain shortage challenges to delivering products, we do not plan to make material increases to our forecasts for the full year. Management estimated that without supply chain shortages revenue growth might have been 2% higher and expects shortages to continue into the next two to three quarters. We think widespread shortages may be causing a general feedback loop with customers looking to build in redundancy to secure supply for their production needs. To mitigate possible order cancellations, the company has started to put non-cancellation clauses into contracts. In the nine months of 2021, organic revenue growth exceeded 2019 levels by 7%. The company continues to put through price increases with a 2.3% average increase in the third quarter. We maintain our wide moat rating and fair value estimate.