Wide-Moat Schneider Electric Is Well-Positioned for Secular Growth; Lifting our Valuation

We raise our fair value estimate for Schneider Electric SU 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.

We forecast annualized organic revenue growth of 6.4% during our five-year forecast period, in line with the previous five years that also benefited from unprecedented price increases. Schneider’s electrical and industrial automation products will benefit from structural themes such as the energy transition, digitalization, and the reshoring of manufacturing facilities that will support organic revenue growth above its longer-term historical levels. Strong pricing power and increasing its 15% service penetration provide headroom for further margin expansion.

The easing of supply chain constraints and execution of its record order backlog (with over six months of revenue visibility) will allow Schneider to reverse the buildup of inventories, supporting improved free cash flow generation. We expect Schneider will deliver EUR 4 billion in free cash flow in 2023, one year ahead of its 2024 target. Gaps in Schneider’s portfolio have mostly been filled and thus we anticipate a reduction in the cadence of large-scale acquisitions, which will support higher returns on invested capital and the possibility for an increase in capital return.