(BFM Bourse) – Deutsche Bank lowered its advice from buy to hold on the stock this Wednesday, judging that a breather should be observed on the stock. HSBC made the same move two weeks ago.
Undoubtedly Schneider Electric has been on the rise for several months on the stock market. The stock has gained 14% since the start of the year, after having already had an excellent 2023 vintage (+39%) with the fourth largest increase in the CAC 40.
The specialist in electrical equipment and energy efficiency technologies has crossed the 100 billion euros mark in market capitalization (currently 119 billion euros). Small consecration: the industrial was included in Citi’s “super seven”, a group of seven major European stocks considered by the American bank as perhaps more promising than the “magnificent seven” (Alphabet, Tesla, Microsoft, Apple , Nvidia, Amazon, Meta) from Wall Street. In addition to Schneider Electric, Novo Nordisk, LVMH, Richemont, ASML, Ferrari and SAP are among these “super seven”.
Schneider Electric particularly delighted the market during a day dedicated to investors in November, when the group unveiled promising growth targets for 2027, supported by its exposure to data centers. The group also passed the annual results test well, with shares increasing by 1.5% following the publication. Last year, Schneider published like-for-like growth of 12.7% while its cash generation jumped 38% to 4.6 billion euros.
“Schneider Electric supports companies in reducing their energy emissions, particularly through monitoring (monitoring that devices consume as little as possible and do not spend energy for nothing, Editor’s note), it is almost a tech value today », Explained at the end of 2023 on BFM Bourse, Frédéric Rozier, co-head of portfolio management at Mirabaud.
Limited potential
But an adage in the stock market is that trees don’t reach the sky. In any case, this is what Deutsche Bank seems to think, which lowered its opinion on the stock from “buy” to “hold” on the stock this Wednesday, with a price target maintained at 200 euros. Which pulls a little on the stock, which fell by 0.5% this Wednesday around 12:15 p.m.
The bank notes that as of Tuesday’s close, the stock has gained 36% since the start of the year and especially 66% since September 2022, when Deutsche Bank moved to purchase. The stock trades at 25 times expected profits over twelve months, which represents a premium of 45% compared to its historical average, and leaves “no margin of safety”, she argues.
Certainly, the growth prospects have improved for the company, which plans to achieve like-for-like growth of 7% to 10% per year on average over the period 2023-2027, as well as an increase in its profit margin of operating before depreciation and certain expenses (Ebita) of 0.5% on average per year over the same period.
But, based on the “PEG” (price-earnings to Growth), which relates the price of a share to the growth of its profit, Deutsche Bank notes that the market already values the group by integrating the top of the range of its objectives, underlines Deutsche Bank.
An underestimated cyclicality?
This while the establishment considers that Schneider Electric’s objectives are ambitious, that is to say not without risks. If the group recorded organic growth of 12% on average over the last three financial years, this average fell to 3% over the 10 years preceding the outbreak of Covid.
“If we do not challenge Schneider’s new status as a steady, well-run company exposed to long-term trends of electrification and digitalization, we fear that investors will overlook the degree of cyclicality that remains in the portfolio”, writes the German bank.
Deutsche Bank estimates that Schneider Electric’s revenues can grow by 6-7%, thanks in particular to data centers and artificial intelligence, which would contribute 1.5 percentage points. But “anything above the 7% mark seems aggressive to us,” she judges.
The establishment also points to the slowdown in the “products” segment, which represents 53% of Schneider Electric’s revenues (compared to 28% for systems and 19% for software and services). In the fourth quarter this segment recorded like-for-like growth of 2%, compared to 5% in the third and 10% in the second. Deutsche Bank expects a still sluggish first quarter, while the decline in activity of key distributors of Schneider products (Wesco, Rexel) confirms the poor trend in demand.
The bank also wonders whether the company is losing ground in industrial automation. This division grew by 18% on a comparable basis compared to its pre-covid level of activity, or four percentage points less than the sector, she notes.
Patience is required
Before Deutsche Bank, HSBC had also revised its rating to “hold” on Schneider Electric from “buy” previously, on February 22.
The Sino-British bank also pointed to the valuation of the group as “full loaded” with very little potential in the short term.
“If Schneider can maintain its current multiples in the years to come, this could generate an increase for investors who have holding periods longer than 12 months, all things being equal,” HSBC nevertheless judged.
“We continue to believe the company is well positioned for future growth from long-term trends including electrification, digitalization, automation, energy efficiency and sustainability, as well as software growth “, also admitted the bank.
Julien Marion – ©2024 BFM Bourse
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