Schneider (SU) is a world leader in the production of electrical equipment and aims to become leader in energy solutions, i.e., offer their customers all possible options (from equipment to services) in energy management. In line with this, the company decided to reorganize its structure in 2010, resulting in the following divisions: (i) Partnership (36% sales), (ii) infrastructure (24%), (iii) industry (18%), (iv) IT (15%) and (v) buildings (7%).
By geographical areas, Europe has always been the most important region for the company, and where it makes 27% of sales, followed by North America, with 26%. Note the significant increase of the weight of emerging countries, which already accounts for 47% of total sales (Asia-Pacific region 27%, rest of the world, 20%).
Strategy and perspectives
Schneider strategy is based on the following objectives: (i) become the sole supplier of energy solutions, (ii) to strengthen its leader role in emerging countries, and (iii) further streamline its operating structure. These targets are consistent with the history of the group which, since 2000, was aimed to establish itself as a world leader in the production of electrical equipment of low and medium voltage, through organic growth and through mid-size acquisitions (up to EUR 1 billion) and very focused to strengthen its portfolio. After several years of strong corporate growth, in 2012 the company began to focus on assimilating these integrations (contribution of new integrations to sales growth were of + 7% in 2011; + 3.5% in 2012), looking for synergies and homogenize standards. Although we believe that organic growth will remain important, we hope that the company will continue carrying out acquisitions.
In the presentation of 4Q results 2013, Schneider revised its outlook slightly downward, noting that it expected a single-digit organic sales growth up to stable and pointed out that it is still waiting for stability in EBITDA margin, adjusting and discounting the currency effect (+ 2.8% reported vs consensus and adjusted EBITDA margin + 1.5% 14.7%).
On 25 October Schneider presented its 3T 2013 sales, which were below expectations. Apart from the strong currency impact (- 5.8% in the quarter; the company pointed out that the currency impact will still be felt in 2014), and highlighted the weakness of organic sales barely recovered against those in the 1S’13 (+ 0.7% in Q3 ‘ 13 vs + 2.6% in Q2 ‘ 13: slower growth in the U.S. as in emerging countries, which were until now the main engines of growth).
These are the most relevant aspects of the company:
Divisions: (i) Partner (36.3% sales): – 4% reported, + 1.4% organic. It is the only division that presented some acceleration in organic sales vs 2T’13 (although smaller than expected). (ii) infrastructure (24% sales): + 8.1% reported, + 1.8% organic. (iii) industry (18.1% sales): – 7.5% reported, + 0.2% organic. (iv) IT (14.9% sales): – 9.5% reported, – 1.8% organic. (v) buildings (6.7% sales): – 8.3% reported, + 0.3% organic.
By region: (i) Europe (27% sales): – 6.6% reported, – 6% organic; It maintained the weakness of previous quarters, affected by double digit falls in Spain and Italy, and more moderate in most other countries, also affected by some reduction of inventories and reduction of capex in renewables in Germany.
(ii) Asia Pacific (27% sales): – 0.2% reported, + 4% organic; highlighted the good development of China and the recovery of Japan vs bad evolution of Australia. However, organic growth was not enough to offset the sharp decline by the currency and at the consolidated level falls in Europe. (iii) North America (26% sales): reported 0.1%, + 3% organic; residential construction remained strong against the lower recovery in nonresidential and the weakness of other sectors such as utilities and mining. Although organic growth remained positive, fell substantially against the levels of 2T’13 (+ 10%). (iv) rest of the world (20% sales): + 5.5% reported, + 2% organic.
The key to Schneider’s evolution would be the economic recovery, especially in Europe, where the company generates 27% of its sales, and where it has suffered the impact of the economic slowdown since the second half of 2011. Until that time comes, we believe that it will rely on its strong exposure to emerging countries for growth.
In terms of ratios, the company’s stock are similar to their pers: PER’14e 14, 18 x (Euro Stoxx industrial: 14.98x vs. Schneider’s historical average of 12.2) and EV/EBITDA’ 14e 10.5 x vs. 10.3 x Stoxx 600 Industrial.
In terms of market evolution, Schneider leads + 13.2% YTD (vs. 19.9% of the Stoxx 600 Industrial) and vs. ES50 +15.7%), so we think that it should reduce this underperformance in the same as the economic recovery is consolidating. Therefore, we would wait until signs of recovery appear in Europe to buy the stock.