One of the best ways to enter a growing market is to invest in its supply chain. It's tough to be a supplier to a big company, but if you're a supplier offering a niche, value-added, viable product or service, you can make big profits.
That's even more important when demand is driven 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 stockbrokers, are held by 17 of the world's top fund managers, representing the top 3% of more than 10,000 global equity managers tracked by financial publisher Citywire.
As a result, Schneider Electric earned the top AAA Elite Company Rating from Citywire, which rates companies based on the level of backing from smart money.
Schneider is a great long-term investment, with total shareholder returns of 348% over the past decade and a projected 25% return through 2024.
Schneider has had success helping its customers save money by reducing their power consumption.
The company supplies a wide range of electrical products, from light switches and sockets in every home, to chargers and energy meters for electric vehicles, high voltage products used on the power grid, and off-the-shelf data centre kit.
These products are complemented by energy management systems that enable businesses to monitor and save on energy usage.
The company also specializes in the digitization and automation of industrial processes, which complements the energy management side of its business, as the efficiencies that come with increased automation also lead to energy savings.
Last year, Schneider acquired the 40% stake it did not already own in British company Aveva, establishing a leading and strong presence in the market for industrial software that helps design, build, operate and maintain industrial facilities.
Schneider is very optimistic about the long-term outlook: it believes the market is worth more than €400bn (£341bn) and could grow to €500bn by 2027, at a rate of 6-7% per year.
This growth is driven by several megatrends, including decarbonization of electricity, reshoring of industry, more people living in cities, increasing regulation, and investments in artificial intelligence (AI), data centers, and the Industrial Internet of Things (IoT).
These trends are leading to strong growth.
Revenues are expected to grow in the 7-10% range annually through 2027. With a notable percentage of fixed overhead costs, rising sales will nicely expand margins in an already highly profitable business.
Because of this, analysts are predicting earnings per share (EPS) to grow at least 13% annually through 2027.
But there is reason to believe that profit forecasts may be too conservative.
Given the transmission and distribution grid upgrades that will be required over the next decade, the potential demand from utilities is enormous: National Grid’s recently announced increase in investment spending on its network could easily be replicated across most of the developed world.
But when a company is doing well, there is always the temptation to become overconfident. Schneider's recent attempt to buy US engineering software company Bentley Systems may be an example of this.
A Bentley-Aveva merger could have created an industrial software company with the scale to challenge the likes of Siemens, but the financial case was less compelling: Buying out Bentley's high-priced shares would have required years of strong growth to generate returns for Schneider shareholders.
The fact that Schneider's shares fell on news of the potential deal and rose after negotiations concluded indicates that these concerns were shared by many investors.
Schneider Electric's existing business has strong growth potential, so there's no need for acquisitions right now, and the company is favored by strong tailwinds, as reflected in its optimistic outlook, which is reflected in the stock trading at more than 27 times next year's projected earnings.
It's likely that future gains will be larger and longer-lasting than currently expected, suggesting that profits could continue to rise if Schneider continues its strong momentum.
Questor says: Buy
Ticker: EURONEXT:SU
Share price: €227.45
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