Yahoo Finance Questor: This French energy tech firm has powered 348pc returns for investors
One of the best ways to tap into a growing market is to invest in its supply chain. Being a supplier to a big company can be a tough existence, but for those that supply niche, value-added and enabling products and services, big profits can be made.
Even more so when demand is powered by several global megatrends.This is why some of the world’s top investors are backing French energy management company Schneider Electric.
The shares, which are available through most UK brokers, are held by 17 of the world’s best fund managers, each among the top 3pc of more than 10,000 global equity managers monitored by financial publisher Citywire.
This has resulted in Schneider Electric being awarded a top AAA Elite Companies rating by Citywire, which rates companies based on their level of smart-money backing.
Schneider has been a great long-term investment with total returns to its shareholders of 348pc over the last decade, which includes a gain of 25pc so far in 2024.
Schneider thrives by helping its customers save money by consuming less electricity.
The company supplies a wide range of electrical products ranging from electrical switches and sockets found in every home, to electric vehicle chargers and power meters, high-voltage products used in electricity grids, and pre-made data centre kits.
These products are complemented by energy management systems which allow businesses to monitor their energy usage and make savings.
The company also specialises in the digitisation and automation of industrial processes. This complements the energy management side of the business as the efficiencies that come with increased automation also tend to bring energy savings.
With the acquisition last year of the 40pc of UK company Aveva it did not already own, Schneider also has a leading and powerful presence in the industrial software market which helps with the design, building, operation, and maintenance of industrial facilities.
Schneider is very upbeat about the long-term prospects. It believes that it has an addressable market of over €400bn (£341bn) which can grow at an annual rate of 6-7pc to €500bn by 2027.
The growth is coming from several megatrends such as decarbonisation of electricity, industrial reshoring, an increasing number of people living in cities, rising regulation, and investments in artificial intelligence (AI), data centres and the industrial internet of things (IoT).
These trends are feeding through to strong growth.
Revenue is expected to grow in the range of 7-10 pc per year out to 2027. With a noteworthy proportion of fixed overheads, increased sales drive decent profit margin expansion on what is already a very profitable business.
This is leading analysts to project annual growth in earnings per share (EPS) of at least 13pc out to 2027.
However, there are grounds for thinking profit forecasts could be too conservative.
The demand potential from electric utilities is immense given the upgrading of transmission and distribution networks that are required over the next decade. National Grid’s recent announcement of increased investment spending on its networks could easily be replicated across most of the developed world.
However, when a company is doing well there is always a temptation for it to become overconfident. Schneider’s recent attempt to buy US engineering software company, Bentley Systems, is possibly an example.
A combination of Bentley with Aveva could have created a sizable industrial software company to take on the likes of Siemens but the financial rationale was less compelling. Paying up for Bentley’s highly valued shares would have needed many years of strong growth to make Schneider’s shareholders better off.
The fact that Schneider’s shares fell on news of a potential deal and rallied when talks ended shows that these concerns were shared by many investors.
The high growth potential of Schneider’s existing businesses means that it doesn’t need to buy companies right now. A rosy outlook is arguably reflected in the shares trading on a price to earnings ratio of over 27 times based on its next year’s forecast profits, but this is a company with a strong following wind behind it.
The potential for future profits to be bigger and last longer than currently expected is strong which suggests riding the coattails of Schneider’s strong momentum can continue to pay off.
Questor says: buy
Ticker: EURONEXT:SU
Share price: €227.45
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