Data Center Reliance And Tightening Regulations Will Erode Relevance

Key Takeaways

• Heavy dependence on the data center segment exposes Legrand to vulnerabilities if sector momentum falters, with other business areas providing minimal growth offset.
  
• Increasing regulatory, environmental, and competitive pressures threaten Legrand's margins, relevance, and ability to capture growth outside its core focus area.
  
• Strong demand in data centers, sustained margin resilience, strategic acquisitions, and focus on digital innovation position Legrand for robust growth and long-term market relevance.

Catalysts

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

• Legrand's exceptional recent growth is almost entirely driven by the data center segment, leaving the rest of its business (building, residential, and office infrastructure) largely stagnant; if data center investment decelerates, group revenue will be severely exposed, with little growth support from other segments.
  
• Global data center expansion is increasingly constrained by energy supply and environmental limitations, and any regulatory tightening or cap on power consumption for hyperscale facilities could rapidly curtail market growth, impacting both Legrand's organic revenue trajectory and acquisition opportunities.
  
• Persistent macroeconomic stagnation, especially in Europe and emerging markets, will likely suppress broader construction activity, capping Legrand's addressable market and undermining the growth assumptions priced into the stock over the medium to long term.
  
• The rapid pace of IoT and smart building technology innovation is attracting agile, tech-native competitors; if Legrand cannot sustain aggressive R&D and capital investments, it faces a substantial risk of margin compression and loss of relevance as its higher-margin segments are commoditized or displaced by next-generation solutions.
  
• Reliance on supply chain global integration exposes Legrand to risks from deglobalization, tariffs, and regionalization-factors that can raise costs for European manufacturers and erode net margins, especially as localization shifts disadvantage Legrand versus regional players in North America and Asia.

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 4.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 13.2% today to 11.5% 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 €4.63). 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 22.9x on those 2028 earnings, down from 28.0x today. This future PE is greater than the current PE for the GB Electrical industry at 14.9x.
• 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 8.53%, as per the Simply Wall St company report.

Legrand Future Earnings Per Share Growth

Risks

• Robust secular demand for data center infrastructure worldwide, evidenced by data centers accounting for 24% of group sales, a substantial order book exceeding one billion euros, and growth forecast upgrades to between 20% and 25% year-over-year, suggest strong visibility and sustainable top-line revenue growth for Legrand.
  
• Continued strategic M&A activity-six acquisitions in H1 2025, with a pipeline suggesting more deals ahead-directly supports portfolio expansion in high-growth fields like energy and digital transition, enhancing long-term revenue and potential earnings accretion.
  
• Successful execution of price increases and operational cost controls in response to tariffs and inflation has allowed Legrand to raise its adjusted operating margin guidance to 20.5%–21% for 2025, and to achieve five consecutive years above 20%, indicating sustained profitability and resilience in net margins.
  
• Secular tailwinds from global electrification, urbanization, and energy efficiency requirements are expanding Legrand's addressable market, particularly as building codes tighten and infrastructure modernizes, supporting both revenue upside and long-term relevance.
  
• Digital transformation and innovation, with heavy investments in product launches and expansion into advanced cooling, connectivity, and smart systems for data centers, position Legrand to benefit from increasing demand for higher-value solutions, potentially driving EBITDA margin expansion and stable or rising long-term earnings.

Valuation

• The assumed bearish price target for Legrand is €83.39, which represents two standard deviations below the consensus price target of €125.23. 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 €160.0, 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 €10.6 billion, earnings will come to €1.2 billion, and it would be trading on a PE ratio of 22.9x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of €129.75, the bearish analyst price target of €83.39 is 55.6% lower.
  
• 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.