Schneider Electric: It’s a great time to buy stocks (OTCMKTS: SBGSF)

Brett_Hondow

Schneider Electric (OTCPK:SBGSF) is rarely cheap given that it has many features that investors value highly. It operates in attractive markets with long avenues for growth, and the company is considered one of the most sustainable companies in the world.

Currently, Schneider is a more attractive price than it has been for a long time. A combination of strong financial performance and a falling share price helped make the valuation very attractive. After hitting a high near $200, the shares fell to below $120. This is despite the company announcing record numbers for 2021 and a very strong start to 2022.

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Data by Y-Charts

For 2021, the company achieved revenue of €29 billion, net profit of €3.2 billion, adjusted EPS of €6.13. It should be noted that this performance exceeded pre-pandemic levels (2019), with sales +7% higher than those of the 2019 financial year and a net profit of +33% compared to the 2019 financial year.

Schneider Electric FY21 Results

Presentation to Schneider Electric investors

Likewise, the company announced a very strong start to 2022, with first quarter revenues up +10% organically, with the two main segments of energy management and industrial automation showing very good performance.

Schneider Electric Q1 2022

Presentation to Schneider Electric investors

It seems that Schneider Electric’s strategy is working well, especially its use of software as a competitive advantage to make its products stickier to customers. Although software represents only about 10% of sales, it has greatly contributed to customer loyalty and provides very attractive recurring revenue. Schneider has made significant acquisitions to strengthen its software strategy, such as Aveva, OSIsoft and Invensys.

Energy management has a significant tailwind as its products will be key to managing the growth of the renewable energy grid and increased electric vehicles. Industrial automation also has a number of benefits, including offshoring and the need to increase factory efficiency and productivity.

Finance

Schneider has made great strides in improving its profit margins. Gross profit margin improved to around 41%, up around 300 basis points from 2016. The main drivers of these improvements were increased industrial productivity, positive net prices throughout the cycle , and mix improvements, including a higher weight of software revenue. What’s great is that the improvements in gross profit margin have also trickled down to operating margins, which speaks volumes about the operating discipline of the company.

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Data by Y-Charts

Schneider estimates it can generate €4 billion in free cash flow by 2024. For comparison, the company currently trades with a market capitalization of around €65 billion. So we’re talking about a multiple of about 16 times free cash flow in a few years.

Schneider Electric FCF

Presentation to Schneider Electric investors

Growth

From 2017 to 2021, Schneider’s markets grew by around 2% per year, with Schneider growing around 2 times faster. For 2022-2024, Schneider expects its markets to grow by around 4% per year, with Schneider continuing to outperform them thanks to its focus on electrification, digitalization and sustainability.

Schneider Electric Growth

Presentation to Schneider Electric investors

Balance sheet

Schneider has a strong balance sheet with a good amount of cash and manageable debt. It has a credit rating of A3/A-, and Schneider is committed to maintaining a strong investment grade credit rating going forward.

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Data by Y-Charts

His net debt / adj. EBITDA is relatively modest, it was only 1.22x at the end of 2021. This gives Schneider Electric great financial flexibility for things like increasing its share buybacks and mergers and acquisitions.

Schneider Electric balance sheet

Presentation to Schneider Electric investors

Orientation 2022

Schneider reaffirmed its forecasts for 2022 Adjusted EBITA growth between +9% and +13% on an organic basis. This objective should be achieved through a combination of organic revenue growth and improved margins. It expects organic revenue growth of +7% to +9% and an adjusted EBITA margin of +30bps to +60bps organic.

Schneider expects the recovery to continue in late-cycle segments, and all regions and end-markets to contribute to growth. She expects continued pressures on the global supply chain to continue to impact in the coming months and increased pressure on input costs due to raw material inflation, labor, freight, etc. Despite the overall inflationary environment and current supply chain pressures, the company is aiming for a positive net price for the full year (including freight and electronics impacts).

Evaluation

Looking at the valuation multiples of the last ten years, it quickly becomes clear that Schneider got a bit ahead of itself towards the end of 2020 and all of 2021. This overvaluation seems to have been fully corrected now, the stocks trading with an EV/EBITDA below the 10-year average of ~12.5x.

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Data by Y-Charts

The price-earnings ratio tells a similar story, now comfortably below the 10-year average of around 21x, and approaching the levels it reached during the worst of the Covid crisis. The difference is that the level of uncertainty is now much lower compared to the start of 2020.

For a high quality company with good future growth, we think a ratio of ~17x p/e is very reasonable.

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Data by Y-Charts

We estimate a net present value of Schneider Electric shares at €117. Our key assumptions are €6.13 earnings per share for 2022 and 7% growth per year for a decade. Since we expect Schneider’s markets to continue to grow above GDP for a very long time, we have assumed terminal growth of 4%. For the discount rate, we used 10%.

Given that the Euro and the Dollar are currently very close to parity, our estimated fair value would translate to approximately $117 for OTC Shares (OTCPK: SBGSF) and approximately $23.5 for ADRs ( OTCPK: SBGSY). That’s very close to the current Schneider Electric stock price, leading us to believe the stock is fairly priced and valued to offer high single-digit to double-digit numbers for long-term investors.

PES Discount @ 10%
AF 22E 6.13 5.57
AF 23E 6.56 5.42
AF 24E 7.02 5.27
AF 25E 7.51 5.13
AF 26E 8.04 4.99
AF 27E 8.60 4.85
AF 28E 9:20 a.m. 4.72
AF 29E 9.84 4.59
AF 30E 10.53 4.47
AF 31E 11.27 4.34
AF 32 E 12.06 4.23
Terminal value @ 4% terminal growth 200.98 64.04
VAN €117.63

Risks

Several risks must be taken into account, in particular macroeconomic and geopolitical. If the company fails to pass on price increases to customers, its margins could deteriorate. So far, he has shown he has pricing power, but there may be a limit to how much his customers are willing to raise. Another significant risk is that since the business operates in attractive markets, it could attract more competition, which would put pressure on growth and profitability. An economic downturn would also affect the company’s growth and profitability, but the risk is mitigated by its strong balance sheet which should enable it to survive until the economy recovers again.

Conclusion

We think now is the perfect time to buy Schneider Electric, given that its valuation has improved significantly thanks to a combination of strong financial results and a declining share price. At current prices, we believe that long-term investors can reasonably expect high single-digit or double-digit returns. We believe this is attractive return potential for a quality company, operating in stable and growing markets, and which has proven to be very well managed.

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