Acquisitions And US Datacenter Strategy Drive Growth Amid Global Challenges

Key Takeaways

• Legrand's acquisition strategy, especially in U.S. datacenters, is key to driving future revenue growth and significant sales in high-growth markets.
  
• Resilience in free cash flow allows investments in M&A and R&D, supporting long-term organic growth and market position enhancement.
  
• Declining construction markets and geopolitical tensions, alongside rising costs and FX impacts, pose significant risks to Legrand's revenue and margins.

Catalysts

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

• Legrand's dynamic acquisition strategy, particularly in the datacenter segment, is expected to drive future revenue growth, especially with the acquisitions contributing to significant sales in high-growth markets like the U.S. datacenter sector.
  
• The company plans to maintain strong adjusted EBIT margins despite the challenges posed by acquisitions, which typically dilute margins. By integrating more profitable acquisitions, Legrand aims to sustain or even enhance its overall earnings.
  
• A strategic focus on the buoyant datacenter market, especially in the U.S., is anticipated to continue providing significant top-line growth, leveraging ongoing demand in this segment.
  
• Resilience in generating free cash flow supports ongoing investments in M&A and R&D, which is crucial for driving future revenue growth and strengthening market position.
  
• New product development and R&D investments are being maintained to fuel long-term organic growth, ensuring that Legrand remains competitive and continues to capture market share, thus potentially supporting both revenue and margin expansion over time.

Legrand Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Legrand's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.9% today to 14.3% in 3 years time.
• Analysts expect earnings to reach €1.4 billion (and earnings per share of €5.15) by about November 2027, up from €1.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.2x on those 2027 earnings, up from 23.7x today. This future PE is greater than the current PE for the GB Electrical industry at 22.0x.
• Analysts expect the number of shares outstanding to grow by 1.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.05%, as per the Simply Wall St company report.

Legrand Future Earnings Per Share Growth

Risks

• The continued decline in the European construction market presents a risk to Legrand's revenue growth, as sales fell by 3.4% over nine months without signs of a short-term recovery.
  
• A significant decline in the Chinese market, which remains under pressure due to a sharp fall in the construction sector, could adversely impact future revenue in the Rest of the World segment.
  
• Temporary higher working capital requirements are affecting free cash flow, which might persist if inventory levels are not adjusted rapidly in response to business declines in regions like Europe, impacting net margins.
  
• Restructuring costs have increased, which could affect net earnings if these expenditures do not lead to the anticipated cost efficiencies across the business.
  
• FX impact and negative scope effects, such as those from Russia, could continue to affect revenue and profit margins if currency movements are unfavorable or geopolitical tensions persist.
  

Valuation

• The analysts have a consensus price target of €105.89 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 €125.0, 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 2027, revenues will be €9.9 billion, earnings will come to €1.4 billion, and it would be trading on a PE ratio of 25.2x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of €97.22, the analyst's price target of €105.89 is 8.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.