- Schneider electric is a company I probably should have written about before now – this 186-year old French giant is perhaps one of the most investable businesses in Europe.
- The company is in the business of providing energy and automatization solutions, addressing home, building/property, data center and industrial needs.
- It combines energy technologies with real-time automation, software and services into a massively-appealing sort of business.
- In this article, we’ll take a deeper look at it.
- Looking for a portfolio of ideas like this one? Members of iREIT on Alpha get exclusive access to our model portfolio.
Schneider Electric (OTCPK:SBGSY) is older than most current European nations in their current configurations. The company was founded, with more or less its current name, in 1836 by two brothers and began working in steel and armament and other industrial concerns. The company grew very rapidly, specializing in heavy machines and transportation, and eventually became known as the Schneider Group.
The company then expanded and acquired its first electrical distribution interest in 1975 when it bought an interest in Merlin Gerin. The company then, between 1981 and 1997, entirely shifted its business into the electrical industry by essentially selling off everything that was considered “non-core” while at the same time buying companies like Telemecanique, Square D, and the rest of Merlin Gerin.
It acquired Lexel in 1999, and the same year it was renamed Schneider Electric, which is the company we’re going to be looking at today.
Schneider Electric – What does the company do?
What we’re looking at today is a company that’s gone through a number of reorgs and refocusing operations. What we see today is a business that consists only of two divisions. These divisions are Energy Management and Industrial Automation.
That is what the company does. Despite the names and segments, Schneider still serves the same segments, and also focuses on the same global megatrends that are currently ruling the markets.
These are electrification in the Low/Medium voltage as well as secure power, and higher degrees of automation.
Schneider is a well-capitalized business that has no significant majority shareholder. BlackRock (BLK) and MFS Investment Management together own about 13-14% of the float, with actual Schneider employees being active in an employee shareholder program at 4.3% of the company’s shares and voting rights.
Like Siemens (OTCPK:SIEGY), this is an extremely well-leveraged company with a high credit rating. For Schneider, this comes in the form of an A- credit rating and equivalents by other rating agencies, where the company’s current net debt/EBITDA is less than 2X as of 2022E.
The company’s main end markets and customers are found in both the non-residential and residential construction markets, electrical markets, energy infrastructures, data centers, and industrial markets. This is a TAM of over $250B on an annual basis, and it’s growing.
On a geographical basis, the company has high exposure to growing or emerging markets of around 43% where the need for electrification is growing, and Schneider has significant expertise in this field.
The company’s main peers are, as mentioned, Siemens, but also businesses like ABB (ABB), Eaton (ETN), General Electric (GE), Emerson (EMR), and Honeywell (HON). What these companies have in common is that they typically grow correlated to GDP – and preferably at a positively adjusted rate to that GDP. Schneider estimates to grow at a GDP + 3% while maintaining an average of 15% EBITDA margins and a ROCE of 11-15%, which is significantly above the company’s 10-20 year average WACC.
Schneider, unlike some of its peers, is an early-stage CapEx company that, unlike some engineering companies, benefits from the early cycle projects. This market position means that it suffered during the financial crisis due to increased end-market pressures but was saved quickly by the growing demand from emerging markets, especially Asia.
However – this does not make for a stable business model. That is why Schneider has pushed for more services along the Siemens route, including service contracts, product integration services, and similar things that would typically make for more of a resilient business.
On a high level, it’s energy management that is 85% of the company’s sales revenues. Industrial automation currently makes up for no more than 15% as of the latest annual numbers. This makes sense when you look at what the company has been doing, and that it’s still shifting to its new segments. The company targets its continued value proposition in the EM business segment, which frankly is better than Siemens and most of its competitors due to its end-to-end nature. While some of the expected margin increases have thus far failed to materialize, with revenue and income increases primarily due to tack-on acquisitions which were dilutive to actual margins and ROCE.
However, Schneider continues to consolidate a very fragmented European and global energy market, with interesting additions both to IA and EM.
Viewing Schneider’s strategy from a historical context, it can be said that the company basically has gone through three quite distinct phases. The first phase between 2003-2013/14 was building up its portfolio of products with large M&A’s in automation and energy management, with the subsequent years trying to effectively integrate all of these moving parts into a sort of global powerhouse in the sector. The latest M&A, Aveva, added more digital/software offerings to the sales mix, and the OSIsoft M&A has taken this yet another step in the right direction.
Schneider is currently aiming for the third phase, which is attempting to offer these services and products in an end-to-end portfolio and scale the offerings accordingly.
All in all, I view this strategy as refreshingly transparent and consider it a positive and in the company’s favor here.
Going into everything the company does would be impossible. Schneider has, during the past near 190 years, done a bit of everything. It built the first French locomotive. It supplies extremely sensitive components to the ITER reactor in France – it does, quite simply, a bit of everything. All of my power outlets in my home, as well as the breaker box, is all Schneider Electric.
You’ll find this company where there is electricity and automation. And this, dear readers, is a good thing. It’s a safe company.
Not the fastest grower, perhaps, or the highest yielder. The current dividend yield is no higher than 2.2%, and there’s not a massive amount of growth to it either (although far higher than some typical 1-5%), but the argument for Schneider here is its safety and strength.
There’s cyclicality to the stock. This allows investors, such as ourselves, to really pick up Schneider cheaply and at valuations where the yield is over 3%. That’s what I did with my comparatively small stake in the company – but I would like more.
On a high level, and as mentioned, Schneider is a play on shifting its business model from being a pure-play equipment manufacturer and supplier to being a solutions provider. This might not be the easiest or quickest shift to make, but given the company’s market position, it’s a very good one if managed well. There have already been clear results here, and optimization and minimizing consumption solutions are already at 45% of sales with data management, quality, and security due to M&As and offerings from APC, Areva, Invensys, and others.
Schneider now has a solid track record of not only executing M&As but successfully integrating the businesses as well. The Aveva M&A is a recent positive example of a very positive and accreditive addition to the company.
Some analysts go so far as to argue that Schneider, at this time, should no longer be viewed as all that cyclical at all, given its successful move to software and service, with a more balanced geographical sales mix. I take a somewhat more conservative stance here, and while I hope this is to be the case, I would argue it’s a bit early to abandon Schneider’s cyclical assumptions at this point in time.
Let’s look at some of the risks to the company as I see them.
Risks to Schneider
There aren’t many high-volatility risks to Schneider, following the company’s adjustments into its current iteration of segments and markets. These changes are positive, and have removed some of the previous ups and downs this company has often operated under.
However, Schneider has a less-than-positive history to overcome. Currently positive and ambitious ROCE targets are quite different from the historical ones, where ROCE always was a slim thing close to 10-11%, which was creeping closer and closer to its WACC. Being a heavy M&A company, it was further penalized by the large goodwill, reflecting these many acquisitions, which have been a drag on company margins. Schneider has, historically and perhaps until now and going forward, been unable to really boost these margins to any sort of impressive degree.
Perhaps the biggest margin though, and what still gives Schneider what I would argue is a definite cyclical characteristic, and one the company can’t get rid of, is its exposure to commodity pricing levels and flows due to its status as a manufacturer.
Schneider uses copious amounts of copper, oil/plastics in its manufacturing, and this makes the company a bit up and down in terms of results – as it always has.
In addition, it can be argued that the company’s operating leverage going forward is going to be limited due to its nature as a service/software company, including people, hardware and software.
To my mind, these few shortcomings are clearly weighed up by the company’s positives, but they are nonetheless worth mentioning here, as they do impact things.
Schneider Valuation
Schneider’s valuation isn’t difficult as such, given the company’s status and many comparable peers. Any conservative upside based on either peer multiples or NAV multiples gives us a bit of upside to Schneider here.
Peer upsides are far better.
I use a number of EU industrials as peers, including aforementioned Siemens, ABB, Atlas Copco (OTCPK:ATLKY), Sandvik (OTCPK:SDVKY) and others. This comes to an average P/E of around 20X, and average EV/EBITDA of 13X, and a P/B of 3X as well as an average yield of just north of 2.8%.
Schneider is undervalued to all of these apart from yield. I apply a 10-15% premium to Schneider based on what I would consider to be a solid core of manufacturing, sales and software/service. When coming out the other side, Schneider is more than 10% undervalued on EV/EBIDA, P/E and even more, closer to 20% on book value.
It is perhaps somewhat premium-dependent, and it aligns well with my assumption that there isn’t a massive undervaluation to Schneider at this particular time. For NAV, we use EBIT multiples for the 2 segments at ranges of 15-17X and the listed value for Aveva Group.
Aveva is over 50% owned by Schneider, and this stake is now worth around €4.7B. The company’s net assets less debt come, depending on applied multiples, to a value of €77B-€83B. This gives us a NAV range based on a net treasury share count of 556M of €138-€149/share. I would weight NAV toward the higher end of this calculation, reflecting the strength of its segments at a higher as opposed to lower multiple.
The picture that I want to leave you with is that there is some upside to Schneider as I see it, just not necessarily all that much. At a declared dividend of €2.9 per share, the yield is just north of 2% here. That means that despite an upside of a few percent – maybe 2-5% depending on how you view it – there may technically be better alternatives available here in EU sectors depending on how your exposure is weighted.
S&P Global gives the company a massive premium, with 22 analysts going a target range from €133-€210 with an average of €170. I’d be curious what assumptions these analysts use to reach €220 – either massive growth, outsized valuations for the segments upwards of 20X+ to EBIT, or some other adjustments. 12 analysts are at “HOLD”/underperform or sell, 10 analysts are either at outperform or “BUY”. The company has an S&P Average upside of 20%.
That, to me, is too high.
I allow for some latitude and premium here and give the company a target of €146/share. This implies an upside of around 3.5%. This is, again still considering the company’s commodity exposures, the ramp-up of the software/service advantages when considering its over 15-year legacy and M&A time, and other things that might weigh on valuation for some time.
I believe this to be an exceedingly conservative and realistic target, that has the potential to positively surprise, as opposed to price targets that we “hope” might materialize – such as that €200+ target.
Thesis
There’s a lot of fundamental upside and things to like about Schneider. That’s why I own and intend to continue buying the stock. Schneider is perhaps one of the safer companies in its segment to invest in.
During COVID-19, it’s shown incredible resilience in sales and margins due to exactly this software/service mix in its mix. The company’s exposure to automation, solution and software has been artificially boosted due to M&A’s, and these have gone extremely well. The major ones to really focus on here are ASCO, Aveva and OSIsoft.
The company has very solid end markets and exposures to all the world’s geographies, with a particular focus on EU, NA and APAC, making for very attractive end markets with a mix of maturity as well as continued emerging market revenue growth.
Overall, Schneider is a very attractive business – just not at a very attractive price at the moment. It’s a barebone upside in the single digits and a yield that’s just north of 2%.
The company has a ADR that’s so-so-liquid. I’d definitely go for the native through one of the brokers that allow for EU trading. Still, SBGSY exists, and it’s a 0.2X ADR that fairly accurately reflects the company’s actual history as well as its current position in terms of valuation and growth estimates.
It reflects well, how based on a 20-21X P/E, where I believe the company deserves to be trading, that the 2024E upside is around 11% annually including dividends.
Sure, the company could most certainly go higher. And yes, the company is currently down compared to its average – that’s why I’m saying “BUY”. But I wouldn’t count on that 25-27X P/E, even if it could generate annualized RoR of 22%.
I would go with the conservative – and the conservative tells us that we’re looking at barely double digits upside at a 2% yield.
That’s not super-exciting – but it’s safe.
I’m long Schneider Electric – and I might buy more in small increments here, though I’ll wait with big buys until that price drops below €135 or so.
The company discussed in this article is only one potential investment in the sector. Members of iREIT on Alpha get access to investment ideas with upsides that I view as significantly higher/better than this one.
About Schneider Electric
Schneider’s purpose is to empower all to make the most of our energy and resources, bridging progress and sustainability for all. We call this Life Is On.
Our mission is to be your digital partner for Sustainability and Efficiency.
We drive digital transformation by integrating world-leading process and energy technologies, endpoint to cloud connecting products, controls, software and services, across the entire lifecycle, enabling integrated company management, for homes, buildings, data centers, infrastructure and industries.
We are the most local of global companies. We are advocates of open standards and partnership ecosystems that are passionate about our shared Meaningful Purpose, Inclusive and Empowered values.
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