One of the best ways to enter a growing market is to invest in its supply chain. Being a supplier to a large company can be challenging, but those who provide niche, value-added and forward-looking products and services can reap big profits—even more so when demand is fueled by several global megatrends.
That’s why some of the world’s leading investors are backing the French energy management company. Schneider Electric (Fri:Sun).
The stock is owned by 17 of the world’s best portfolio managers – each ranked in the top 3% of stock managers worldwide. As a result, Schneider Electric received the highest AAA elite company rating based on the level of smart money support.
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Schneider has been a great long-term investment. The company thrives on helping its customers save money by using less electricity.
Big business
“Basically, they make equipment to facilitate the energy transition through electrification,” said Jonathan Waghorn, an Elite manager who oversees the Guinness Sustainable Energy fund, which counts Schneider as its fourth-largest holding.
In particular, Schneider supplies a wide range of electrical products: from the electrical switches and sockets found in every home, to electric vehicle chargers and energy meters, high-voltage products used in electrical grids, and complete kits for data centers.
These products are complemented by energy management systems that allow businesses to control energy consumption and save money.
The company also specializes in digitalization and automation of industrial processes. This complements the energy management aspect of a business, as efficiency gains achieved through increased automation also tend to result in energy savings.
By acquiring a further 40% of the UK company Aveva last year that it did not already own, Schneider has also secured a leading and powerful presence in the market for industrial software that helps design, build, operate and maintain industrial facilities.
Schneider is very optimistic about his long-term prospects. The company believes it has an addressable market of over €400 billion, which could grow at an annual rate of 6-7% to €500 billion by 2027.
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Multimegatrends
“It is benefiting from the structural trend of electricity use as a share of humanity’s increasing energy consumption,” said Mark Denham, manager of the Carmignac Portfolio Grande Europe fund, whose fifth-largest holding is Schneider.
‘Electric vehicles [EVs] This is one example: data centers require a huge amount of electrical infrastructure, as do building owners if they want to more efficiently manage heating, ventilation, etc. We see Schneider as being well positioned to provide equipment to meet this demand.”
Waghorn said: “In the very near future we will see … enthusiasm in the market for artificial intelligence and cloud computing, and this is extremely energy intensive and requires heating, cooling, electrical equipment and reliability of supply.”
The structural trend toward increased energy consumption and management is underpinned by a number of other megatrends beyond the rise of AI-powered data centers, electric vehicles, and the broader energy transition. These include industrial reshuffling, more people living in cities, increased regulation and investment in the Industrial Internet of Things.
All of this contributes to Schneider’s strong financial performance. Revenue is expected to grow 7-10% per year by 2027. Given the significant amount of fixed overhead costs, increased sales translates into a decent increase in profits in what is already a very profitable business.
This has analysts forecasting annual earnings per share (EPS) growth of at least 13% through 2027. However, there are reasons to believe that earnings forecasts may be too conservative.
The demand potential from electric utilities is enormous given the upgrades to transmission and distribution networks that will be required over the next decade. National Grid’s recent announcement to increase investment spending on its networks could easily be replicated in most of the developed world.
Overconfidence?
When a company is doing well, it is always tempting to become overconfident. Schneider’s recent attempt to buy US software company Bentley Systems is perhaps an example of this.
A combination of Bentley and Aveva could create a major industrial software company that could compete with Siemens, but the financial case was less compelling. Paying for Bentley’s highly valued shares would require many years of strong growth to improve the wealth of Schneider shareholders.
The fact that Schneider shares fell on news of the potential deal and rose after the negotiations ended shows that these concerns were shared by many investors.
The high growth potential of Schneider’s existing businesses means it doesn’t need to buy companies right now. The bright outlook may be reflected in the stock trading at a price-to-earnings multiple of more than 27 times, based on next year’s earnings estimates, but there are strong tailwinds behind the company.
The likelihood that future gains will be larger and last longer than currently expected is high, suggesting that riding on Schneider’s strong momentum could continue to bear fruit.
Key facts – Schneider Electric SE | |||
---|---|---|---|
Market capitalization | 131 billion euros | Price | 227 euros |
Net debt | 9.13 billion euros | Net Debt/Ebitda | 1.2x |
52 week high/low | 239 euros / 134 euros | Return on invested capital | 15.3% |
Highest price per profit | 25.8 | First dividend yield | 1.7% |
Fastest EPS Growth | 14.2% | share price for 12 months | 38.5% |
Source: FactSet, as of May 30, 2024. EPS = earnings per share. Ebitda = earnings before interest, taxes, depreciation and amortization. Forecasts for the next 12 months.
This article first appeared in The Telegraph magazine. Quaestor column.