Summary
- Schneider Electric impressed with very strong financial results in what was a relatively challenging year with supply chain issues and inflationary pressures.
- Schneider has a very significant backlog that gives future revenue visibility, and is one of the reasons behind the strong 2023 guidance the company provided.
- We have been recommending Schneider Electric for some time, but after significant price appreciation in the shares we are now moving to a 'Hold' rating.
Schneider Electric ( SBGSF )( SBGSY ) impressed with very strong financial performance despite 2022 being a relatively challenging year. The company delivered record revenues, adjusted EBITDA, and net income. Among the highlights of the year was the completion of the transaction to acquire the entire share capital of AVEVA, which will allow Schneider to accelerate on its software strategy.
For 2023 Schneider is targeting organic growth in its adjusted EBITA of between 12% and 16%, driven by organic revenue growth and adjusted EBITA margin expansion. This is very solid guidance from the company, but for investors this is partially offset by a valuation that is a little less attractive compared to where we were recommending the shares last year. Since we wrote that it was a great time to buy shares, the price has increased by ~33%, and since our last article saying that it wasn't too late to buy, the shares are up ~14%, significantly outperforming the market. We believe there is still some value at current prices, but the company is now trading much closer to fair value.
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FY2022 and Q4 Results
Schneider reported FY22 revenues of €34 billion, up 12% organic, with Energy Management up ~13% and Industrial Automation up ~10%. For Q4 revenues were up ~16% organic, as the company showed an acceleration in the second half of the year.
FY22 Adj. EBITA came in at €6 billion, up ~14% organic and ~21% reported, with an adj. EBITA Margin of 17.6%, up 40 bps. Schneider delivered net income for the year of €3.5 billion, up 9%, and adj. net income of €4.0 billion, up an impressive 16%. Thanks to the strong results the company is planning a dividend increase of 9%.
Portfolio Repositioning
Schneider has completed a disposal program that involved €1.7 billion of revenues, as well as a structural savings program of €1 billion that it now considers delivered. This better aligns the company with its software strategy focused now on its most promising offerings, which converge in its data hub. Given the strong guidance for 2023, we believe the strategy appears to be working well.
Backlog
Another reason why the company is providing a strong 2023 guidance is that it has the backlog to support the expected growth. Its backlog has gone from ~3.5 months of sales in 2018, to ~6 months of sales now. This should provide a very nice tailwind for growth, especially as the company reports there have been no significant cancellations.
Schneider Electric Investor Presentation
Balance Sheet
The acquisition of the remaining AVEVA shares will have an impact on the balance sheet, and it is expected that it will increase leverage to ~1.6x. This is still a very reasonable amount of leverage for the company, and we are not overly concerned.
Schneider Electric Investor Presentation
Guidance
For 2023 the company expects to see some deceleration in consumer-linked segments such as residential buildings, particularly in mature markets The supply constraints are expected to progressively ease, and the inflationary pressure is expected to moderate. Importantly, the significant order backlog should provide a nice growth tailwind. Based on these assumptions the company is guiding for 2023 adj. EBITA growth between 12% and 16%, driven by 9% to 11% organic revenue growth and 50 bps to 80 bps of adj. EBITA margin improvement.
Schneider Electric Investor Presentation
Valuation
With the native shares trading at ~€155 and the company having just delivered adjusted EPS of €7.11 for 2022, the price/earnings ratio based on adjusted EPS stands at ~21.8x. This is very close to the ten year average p/e ratio, and what we believe is a reasonable multiple for a company growing earnings at a low double digits rate. On a forward basis the p/e ratio is closer to 19x, as the company is expected to grow earnings in 2023 by ~14%. As we believe shares are very close to fully valued and we see an increased risk of recession, we are updating our rating to 'Hold', from 'Buy' previously.
Risks
In the short to medium term the biggest risk we see for Schneider Electric investors is a potential recession arriving soon. In the long-term we worry about increased competition, especially from emerging market players that could compete aggressively on price.
Conclusion
Schneider Electric impressed with very strong financial results in what was a relatively challenging year, with supply chain issues and inflationary pressures. We have been recommending Schneider for some time, but after significant price appreciation in the shares we are now moving to a 'Hold' rating. The company should continue benefiting from the tailwinds from increased digitization and sustainability initiatives around the world, and from its software strategy that is now bolstered by complete control of AVEVA. This continues to be one of the highest quality industrial companies we are aware of, and as such we will continue following its progress.
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Schneider Electric Impresses With Its 2022 Results