Morningstar | Schneider Raises Guidance for the Second Time This Year; Shares Attractive
Wide-moat Schneider's third-quarter revenue update brought a few pieces of good news: continued recovery in the medium-voltage business (after four years of negative to flat revenue performance), mid-single-digit organic revenue growth across all divisions, and increased guidance for the second quarter in a row. The guidance increase was a tightening of the previously given range, towards the high end on organic revenue and EBITA growth at close to 6% for revenue and 8%-9% on EBITA, with some help from margin expansion. We view Schneider Electric as well positioned for the long-term shift towards automation in industrial processes, particularly in process automation. The results are slightly ahead of our expectations, particularly on the medium-voltage side. We expect to revise up our forecasts but without a significant impact to our fair value estimate, which we maintain at EUR 80 per share. We find the shares attractive.Most surprising for us was the second quarter in a row of mid-single-digit organic growth in the medium-voltage division, showing a turnaround after ailing for the past several years. Division results also beat consensus, up 8% on an organic basis versus a 2% level expected by consensus. These results are flattered by the low base of the previous year; however, we see indications that Schneider has been able to cross-sell across divisions, more than other industrial cap good companies in our coverage. In medium-voltage, the company has been successful in tacking other division orders onto its largest division, low-voltage, where it is the industry leader.
In industrial automation, which we see as key to reinforcing the company's longer-term switching costs with customers, the division increased organic revenue by 7% with double-digit software sales out of the Aveva joint venture and benefiting from orders in process automation from oil and gas sector in particular. Year-to-date, the division has grown 9%, the highest of all the divisions.
For more details on our views on Industry 4.0 and Schneider's position in industrial automation, please see our recent Observer: "Moats in Industry 4.0: The Underrated Control Freak; Switching Costs Weak & Strong for ABB and Schneider".
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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