Raising Our Fair Value Estimate for Legrand to EUR 87 After Taking a Fresh Look

We increase Legrand’s LR 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.

We forecast 6.4% annualized revenue growth during our five-year forecast period, including 2.5% growth through acquisitions. The majority of Legrand’s markets are mature, which has required the group to expand into complementary products and new geographies through acquisitions in order to boost its growth prospects. Legrand’s global addressable market remains highly fragmented, offering plenty of runway for accretive acquisitions. Legrand targets average sales growth of between 5% and 10%, which incorporates half of its free cash flow funding acquisitions.

Legrand has consistently generated 50% gross margins and ROICs in the midteens thanks to its narrow moat rating, which is derived from intangible asset and switching cost moat sources. Legrand commands premium pricing resulting from its track record for reliable electrical equipment, which has a high cost of failure. Equally important are its close relationships with key decision-makers throughout the sales channels, mainly distributors and installers. The latter are largely price insensitive—valuing reliability, product availability, and ease of installation above price. Legrand has managed to raise its selling price by an average of 2.3% per year between 2010 and 2022, supporting consistent profitability through the cycle. Switching costs are also evident, created by the extensive training Legrand provides installers.