EUR 850.00 For Business Accounts Only

Morningstar | Schneider's 2018 Slightly Better on Margin Expansion; Shares Attractive

Wide-moat Schneider Electric's fourth-quarter results were in line with expectations on revenue growth and slightly better on EBIT and EBIT margin. We are maintaining our EUR 80 fair value estimate and think the shares are trading at an attractive price. Key for investors is the sustainability of the company's earnings growth relative to the lacklustre performance of the last decade or so. The past couple of years have improved, including 2018, with 10% EBITA growth exceeding the 9% top end of the guidance range. Built into the 2018 performance was 7% organic revenue growth that was mainly volume driven. Price will help drive revenue growth in 2019, more so than in 2018, when price increases designed to offset raw material cost inflation were only introduced halfway through the year. Schneider's order demand looked broadly solid across end markets and geographies exiting 2018. Guidance for 2019 of 4%-7% organic EBITA growth implies more moderate growth relative to 2018, which we do not see as a cause for concern, given the unusually high growth posted in some of the company's product lines in 2018. Low voltage, the company's largest segment, posted unusually high organic growth of 8% for the year, so we would expect some moderation in that segment's growth in 2019.

Some of 2018 growth improvement is a function of healthier end markets relative to the recent past. However, an element of more sustainable demand is also at play with the market for energy efficiency in buildings and productivity improvements in plants still underpenetrated, largely due to the nascency of the products tackling inefficiencies through data crunching and algorithms. Schneider has been showing some progress in cross-selling/bundling product lines to take advantage of this demand. In 2018, cross-selling was most successful in energy, water, and commodity-related customers, boosting growth in the low-voltage segment.