Investing In Global Expansion And Sustainability Will Boost Future Prospects

Key Takeaways

• Schneider Electric's strong performance in energy management and data centers drives significant revenue growth and efficiency improvements.
  
• Expansion into high-margin services and continued global investment boost net margins and operational efficiency.
  
• Regulatory fines and currency volatility, along with challenges in China's market, threaten Schneider Electric's margins and revenue growth amidst geopolitical and pricing pressures.

Catalysts

Engages in the energy management and industrial automation businesses worlwide.

• Schneider Electric's growth is driven by strong performance in Energy Management, particularly in data centers, which is seen as a significant opportunity due to increasing demand for electrification and digitalization. This is expected to positively impact revenue growth.
  
• The company is well-positioned in AI and high-power data center markets, which are expected to see double-digit growth. This growth is supported by their unique positioning across low, medium voltage, digital building technology, and UPS, impacting both revenue and net margins through increased efficiencies and sustained demand.
  
• Schneider Electric's strategy focuses on expanding high-margin services such as digital services and software solutions, highlighted by the AVEVA Group's 15% growth in annual recurring revenue. This shift toward higher-margin services is expected to enhance net margins and recurring revenue streams.
  
• Continued investment in capacity, especially in strategic growth regions like the U.S., India, and Middle East and Africa, aims to support growing demand. These investments are anticipated to drive revenue growth and improve operational efficiencies, translating into better net margins.
  
• The company's focus on sustainability and innovation, like the AirSeT technology and commitment to digital transformation, is aligned with market demands, potentially increasing revenue while enhancing the brand's value and market share, contributing to earnings and profitability.

Schneider Electric Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Schneider Electric's revenue will grow by 8.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.2% today to 13.8% in 3 years time.
• Analysts expect earnings to reach €6.7 billion (and earnings per share of €11.91) by about February 2028, up from €4.3 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 27.7x on those 2028 earnings, down from 33.8x today. This future PE is greater than the current PE for the GB Electrical industry at 16.6x.
• Analysts expect the number of shares outstanding to grow by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.56%, as per the Simply Wall St company report.

Schneider Electric Future Earnings Per Share Growth

Risks

• Schneider Electric's financial performance in 2024 was negatively impacted by a noncash impairment and a fine from the French Competition Authority, affecting net margins and indicating potential regulatory risks.
  
• The company's exposure to currency fluctuations, as highlighted by a negative FX impact due to the weakening Chinese yuan and other volatile currencies, poses a risk to revenues and earnings.
  
• Weakness in China's construction market and overall modest demand recovery in Industrial Automation, particularly Discrete Automation, could negatively affect future revenue growth.
  
• Changes in U.S. tariffs and evolving geopolitical landscapes, particularly involving trade agreements with Mexico, could result in higher costs and impact profit margins.
  
• Pricing normalization in the Systems business and the potential impact of normalized pricing strategies in 2025 may lead to more muted gross margin improvement, affecting overall profitability.

Valuation

• The analysts have a consensus price target of €264.106 for Schneider Electric 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 €308.03, and the most bearish reporting a price target of just €214.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €48.6 billion, earnings will come to €6.7 billion, and it would be trading on a PE ratio of 27.7x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of €257.4, the analyst price target of €264.11 is 2.5% 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.