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Morningstar | Schindler's Restructuring Provides Buffer Against Raw Material Price Increases

Schindler's first-half revenue growth and EBIT margin surprised positively, with management raising full-year guidance as well. We expect to increase our fair value estimate by 4%-5%, but even so, we believe the shares are expensive. We maintain our wide moat rating.

Organic and reported revenue growth in the first half came in at 8% and 10%, respectively, leading management to increase organic revenue growth guidance by 200 basis points to 5%-7%. Roughly 60% of Schindler's orders come from developed markets, with lower new installation growth potential versus emerging markets; however, a pickup in the construction cycle temporarily rejuvenates growth in those markets, and the company saw good new installation growth in Europe, the Middle East and Africa on the back of strong construction activity. At the group level, orders for new installations still grew at a slower pace than service and upgrade-related revenue.

Impressively, the first-half EBIT margin remained stable year over year despite raw material price increases across the capital goods sector. The result was also better than the 160-basis-point decline at Kone, Schindler's peer and the number-one elevator and escalator supplier in the world's largest elevator market, China. Historically, Schindler has had lower margins relative to peers of the same size on a global basis and Kone in particular. It still does, but the gap has been shrinking as Schindler has reduced the diversity of parts used across its equipment lines, allowing it to gain scale with suppliers as well as streamline its assembly process. The cost savings and productivity gains from those measures, combined with less exposure to China's fierce pricing environment, have enabled Schindler to better weather raw material cost increases this year. We forecast further margin expansion by around 200 basis points over the next five years, but we believe the market is well aware of this potential, with shares already pricing it in.