EUR 850.00 For Business Accounts Only

Morningstar | Saint-Gobain Is Facing a Slowdown in European Construction Markets

Compagnie de Saint-Gobain is a global giant in the building materials industry. Given its significant exposure to European construction markets, the company's financial performance improved in recent years with the European economy, but the outlook is now more precarious with leading indicators pointing toward a slowdown in the region. Key business segments include innovative materials (flat glass, high-performance materials), construction products (interior solutions, exterior solutions), and building distribution.In addition to increasing exposure to construction-related end markets, major corporate goals include expanding operations in emerging markets and increasing the number of differentiated products. We think these are both valuable endeavours. During the past decade, sales in emerging markets have grown at a 9% clip, while developed markets have essentially flat-lined. In addition, margins in emerging markets tend to be meaningfully higher. Differentiation is primarily seen in the high-performance materials segment, where products are often codeveloped with customers. As a result, this segment benefits from switching costs and arguably the best returns on capital; we would be pleased if it were to become a bigger component of the company’s business portfolio.While emerging markets continue to increase in importance at Saint-Gobain, the company’s near- to medium-term fortunes are still largely tied to a recovery in European construction markets, particularly France. France has improved recently, but political issues may cause the recovery to be cut short. The company has embarked on an ambitous transformation program. The overarching goal is to increase the operating margin by 100 basis points by 2021 through a EUR 250 million cost savings program, a EUR 3 billion in sales divestment program, and a much leaner organizational structure. Success would result in the operating margin rising to at least 8.5% and up to 10% with volume leverage. While we expect some improvement, we remain skeptical that even the bottom end of the range will be achieved without more drastic portfolio changes.