Morningstar | Schneider Electric 1Q Revenue Delivers Strong Growth: Shares Offer Modest Upside
Wide-moat Schneider Electric grew revenue organically by nearly 6% in the first quarter, a good result given the weakness in some macro indicators in 2019. We think the company is benefiting from growth products related to industrial automation and also effective cross-selling evidenced by revenue growth across divisions in the last year. We were also told about anecdotal signs of cross-selling lately, with various competitor product representatives at the Hanover trade fair mentioning that Schneider was pushing products, where they had previously been less active, to some competitor customers. Strategically, Schneider (as well as Siemens) has been more astute at building an aligned product portfolio of equipment and software, making cross-selling more natural. ABB lags in this area. However, we see more upside for ABB shares, as Schneider Electric shares have rallied nearly 28% year-to-date, starting to close in on our EUR 80 fair value.The energy management division grew revenue 7% organically, with North America posting nearly 12% growth with support from both residential and commercial low- and medium voltage product demand. Data centers also grew, although the revenue is no longer reported explicitly. Western Europe, at the other end of the spectrum, grew just 3% including a slowdown in France.
Industrial automation grew 4% organically, with discrete, which is related to general manufacturing showing slower growth than process. China was slower on discrete demand from machine and equipment builders, perhaps being affected by the trade war. Process industries related to energy showed better growth and the company is seeing greenfield opportunities to expand its process controller base.
Software grew by double digits and is now more than 10% of the revenue base. We expect software to increase its pace of growth in the near term as the company launches new software applications in the next one to two years, leveraging its AVEVA acquisition.
Schneider Electric is engaged in energy management. Co. is organized into four areas: Buildings and Partner, Infrastructure, Industry and IT; and operates in four principal markets: non-residential & residential buildings, utilities & infrastructure, industry & machine manufacturers and data centers & networks. The non-residential and residential buildings market includes end-users, property developers, design firms, and systems integrators. The utilities and infrastructure market includes energy operators. The industries market serves end users and companies, and engineering firms. The data centers and networks contain servers that process and store digital data in secure rooms.
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