Investments In Energy And Digital Transition Will Drive Future Competitiveness

Key Takeaways

• Strong data center growth and strategic acquisitions boost revenue, with restructuring efforts sustaining profitability despite complex markets.
  
• Investment in connected health and energy efficiency may enhance margins through high-margin offerings and innovative R&D initiatives.
  
• Legrand's revenue growth is at risk due to China's market decline, reliance on data centers, and potential U.S. tariffs impacting costs and margins.

Catalysts

Manufactures, distributes, and sells electrical and digital building infrastructures in Europe, North and Central America, and internationally.

• Legrand's strong growth in data centers is expected to continue, with projections for sustained double-digit growth. This is likely to significantly boost both revenue and potentially margins due to increased volume and efficiency.
  
• The company plans to accelerate growth with targeted sales increases of 6% to 10% in 2025, driven in part by past acquisitions and future M&A activity. These efforts may positively impact revenue and earnings through expanded market presence and operational synergies.
  
• Continued investment in the promising connected health market and energy efficiency offerings can drive revenue growth, possibly enhancing net margins through higher-margin product lines.
  
• Legrand’s strategic restructuring initiatives are expected to maintain high operating margins, sustaining profitability despite complex market conditions, thus positively impacting earnings.
  
• The company's ongoing R&D and innovation efforts, supported by a robust balance sheet, aim to launch new products in energy and digital transition, potentially influencing revenue growth and market competitiveness.

Legrand Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Legrand's revenue will grow by 7.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.5% today to 13.8% in 3 years time.
• Analysts expect earnings to reach €1.5 billion (and earnings per share of €5.57) by about April 2028, up from €1.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.4x on those 2028 earnings, up from 21.3x today. This future PE is greater than the current PE for the GB Electrical industry at 14.1x.
• Analysts expect the number of shares outstanding to grow by 0.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.81%, as per the Simply Wall St company report.

Legrand Future Earnings Per Share Growth

Risks

• The sharp decline in China's construction market could negatively impact Legrand's revenue growth, given their significant market exposure in that region.
  
• Organic sales growth in Europe experienced a decline, particularly in the building market, which might constrain revenue expansion efforts within that region.
  
• A substantial portion of anticipated sales growth is expected from data centers, making Legrand heavily reliant on this segment for future expansion, thus posing a risk if demand in this sector fluctuates.
  
• The potential implementation of tariffs on goods imported into the U.S. could add significant costs, affecting net margins unless effectively mitigated by increased pricing or cost cutting.
  
• Restructuring expenses have been substantial and may continue to impact net earnings as Legrand adjusts its operations across various geographies.

Valuation

• The analysts have a consensus price target of €108.667 for Legrand based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €126.0, and the most bearish reporting a price target of just €82.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €10.7 billion, earnings will come to €1.5 billion, and it would be trading on a PE ratio of 24.4x, assuming you use a discount rate of 7.8%.
• Given the current share price of €94.56, the analyst price target of €108.67 is 13.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.