Automation And E-Commerce Will Erode Traditional Construction Outlets

Key Takeaways

• Increasing automation, digitalization, and direct purchasing channels threaten Rexel's traditional customer base, potentially reducing market share and pressuring top-line growth and margins.
  
• Heavy dependence on the cyclical construction sector and ongoing investment in digital transformation expose earnings to heightened volatility and risk of weak cash generation.
  
• Strong digital and North American growth, strategic acquisitions, cost discipline, and market stabilization signal resilient earnings potential and structural improvement in profitability.

Catalysts

Engages in the distribution of low and ultra-low voltage electrical products for the residential, commercial, and industrial markets in France, rest of Europe, North America, and the Asia-Pacific.

• The increasing automation and digitalization of the construction and maintenance sector threatens to erode Rexel's core customer base, particularly as major clients shift towards more direct and digital purchasing channels. This may result in sustained long-term pressure on top-line growth, limiting Rexel's ability to drive revenue expansion even as traditional trade distribution volumes decline.
  
• Strengthening environmental regulations and the acceleration towards ultra energy-efficient buildings are likely to encourage more end-customers and contractors to bypass traditional broadline distributors in favor of specialized green or direct-from-manufacturer suppliers. This disintermediation could lead to a shrinking market share for Rexel and persistent headwinds for top-line sales and gross margin over time.
  
• Despite the expansion of Rexel's digital sales and e-commerce initiatives, persistent e-commerce disruption and the rise of global online B2B marketplaces expose Rexel to greater price transparency and intensified competition. This is expected to drive net margin compression and undermine earnings growth, especially as SME and contractor customers become increasingly price sensitive.
  
• Rexel remains highly dependent on the cyclical construction market, making its earnings vulnerable to future downturns. Any prolonged slowdown in European or global construction and renovation activity would significantly increase earnings volatility, put pressure on operating income, and amplify the risk of negative surprises to profit and free cash flow.
  
• The ongoing need for large-scale digital and service transformation investments could yield disappointing returns, leading to elevated capital expenditures without commensurate improvements in revenue, margins, or return on capital employed. This scenario risks a sustained decline in Rexel's earnings quality and cash generation, especially as competitors and manufacturers continue to consolidate the market and outpace Rexel in specialized product offerings and advanced services.

Rexel Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Rexel compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Rexel's revenue will grow by 1.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.3% today to 4.3% in 3 years time.
• The bearish analysts expect earnings to reach €871.4 million (and earnings per share of €2.95) by about August 2028, up from €247.6 million today. 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 8.4x on those 2028 earnings, down from 31.4x today. This future PE is lower than the current PE for the GB Trade Distributors industry at 78.6x.
• Analysts expect the number of shares outstanding to decline by 1.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.85%, as per the Simply Wall St company report.

Rexel Future Earnings Per Share Growth

Risks

• The accelerating growth in North America, especially in high-potential segments like data centers and broadband infrastructure, demonstrates Rexel's exposure to secular trends of digital transformation and electrification, suggesting potential for sustained revenue and margin expansion as these trends intensify.
  
• Robust digital sales growth-with approximately 34% of total sales in Q2 and continuing year-on-year increases-points to improved operational efficiency, enhanced customer loyalty, and long-term uplift in both top-line growth and net margins as the company captures more value from SMEs and contractors.
  
• Rexel's successful execution of cost reduction initiatives, OpEx discipline, and ongoing productivity gains through automation and AI-enabled back-office processes indicate increasing resilience and sustained profitability, supporting higher adjusted EBITA margins over the medium term.
  
• Continued portfolio optimization through targeted acquisitions in high-growth, higher-margin business adjacencies, coupled with disciplined divestitures, positions Rexel for structurally higher returns on invested capital and resilient recurring earnings growth.
  
• Early signs of stabilization and potential rebound in European construction and renovation markets, supported by declining interest rates and increased loan activity, could lead to upside surprises in revenue and earnings if the macro environment improves faster than anticipated.

Valuation

• The assumed bearish price target for Rexel is €20.13, which represents two standard deviations below the consensus price target of €27.95. This valuation is based on what can be assumed as the expectations of Rexel'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 €33.0, and the most bearish reporting a price target of just €18.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €20.3 billion, earnings will come to €871.4 million, and it would be trading on a PE ratio of 8.4x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of €26.32, the bearish analyst price target of €20.13 is 30.7% 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.