Data Center Reliance And Tariffs Will Squeeze Future Margins

Key Takeaways

• Heavy dependence on data center sales creates vulnerability to revenue shocks if demand slows, while other segments remain weak amid sluggish construction markets.
  
• Rising costs from tariffs, compliance, and supply chain shifts erode margins, with intensifying competition and regulatory demands threatening future profitability and growth stability.
  
• Strong digital infrastructure growth, pricing power, strategic expansion, financial discipline, and sustainability focus underpin resilience, diversified revenue streams, and margin stability.

Catalysts

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

• The company's exceptional sales growth in North America is almost entirely concentrated in data centers, while the rest of the business is either stagnant or declining. Overreliance on a single segment driven by extraordinary demand cycles increases the risk of sharp future slowdowns, which could trigger negative surprises for revenue and top-line growth if spending in data centers normalizes or hyperscaler investment stalls.
  
• Increasing outsourcing and supply chain adjustments-relocating sourcing from China to Vietnam, India, and Mexico-are merely reactive measures to tariffs rather than true value creation, putting pressure on margins as Legrand faces intensifying global competition from lower-cost Asian manufacturers, threatening long-term pricing power and eroding earnings resilience.
  
• Prolonged and escalating tariffs on key imports into the U.S. are expected to drive $150 million to $200 million in additional annual costs (with risk of exceeding $300 million if trade tensions worsen). This will require repeated price hikes that risk volume declines and long-term customer pushback, leading to margin compression or even negative operating leverage if Legrand's ability to fully pass on costs deteriorates.
  
• The slow pace of recovery in residential and non-residential construction in both Europe and the U.S.-with persistent sluggishness in non-data center markets and no clear signals of a cyclical rebound-implies that headwinds in Legrand's traditional, higher volume segments are likely to persist. This undermines the possibility of broad-based growth, further concentrating risk and reducing earnings visibility.
  
• Heightened regulatory, tariff, and ESG requirements globally will drive up compliance costs, increase restructuring expenses (as already reflected in quarterly charges), and delay product rollouts. Combined with the threat of alternative, lower-cost building materials and pre-fabricated construction, these pressures are set to weigh on net profit margins and impair long-term return on capital.

Legrand Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Legrand compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Legrand's revenue will grow by 4.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 13.3% today to 12.0% in 3 years time.
• The bearish analysts expect earnings to remain at the same level they are now, that being €1.2 billion (with an earnings per share of €4.61). The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 22.7x on those 2028 earnings, down from 27.4x today. This future PE is greater than the current PE for the GB Electrical industry at 17.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.28%, as per the Simply Wall St company report.

Legrand Future Earnings Per Share Growth

Risks

• The rapid acceleration in global data center investment, as reflected in Legrand's record growth in this segment and a robust order backlog, indicates that secular digitalization and cloud migration trends are fueling strong and potentially sustained revenue growth for Legrand's high-margin digital infrastructure offerings.
  
• The company's demonstrated pricing power, supported by a unified tariff-driven cost structure across the industry and a history of successfully passing on cost increases to customers, suggests Legrand will be able to mitigate elevated input costs and defend or maintain healthy net profit margins.
  
• Legrand's ongoing commitment to expanding capacity and strategic M&A, especially in adjacent sectors like connected healthcare and in high-growth regions such as Asia-Pacific, positions it to capture new sources of revenue and diversify earnings, which supports ongoing top-line growth and resilience.
  
• A strong balance sheet, with a net debt-to-EBITDA ratio of 1.5, ongoing high levels of free cash flow, and disciplined capital allocation, ensures the company can weather macroeconomic volatility, fund strategic growth, and return more cash to shareholders, all of which support stable or improving earnings and margins.
  
• The company's ability to execute on long-term sustainability and CSR roadmaps, already fully embedded in its value-creation strategy, enhances its market access, brand value, and pricing power-especially as green regulations tighten, supporting revenue growth and providing a potential margin tailwind.

Valuation

• The assumed bearish price target for Legrand is €82.94, which represents two standard deviations below the consensus price target of €117.11. This valuation is based on what can be assumed as the expectations of Legrand's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €140.0, and the most bearish reporting a price target of just €82.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €10.1 billion, earnings will come to €1.2 billion, and it would be trading on a PE ratio of 22.7x, assuming you use a discount rate of 8.3%.
• Given the current share price of €123.6, the bearish analyst price target of €82.94 is 49.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.