Have you heard of Schneider Electric before?
If not, it’s about time you do.
Schneider Electric has recently been ranked as the world's most sustainable company, jumping from the 29th position in 2020 to the very top in 2021. This global manufacturer of electrical power products is leading the way in supporting the green revolution. Their slogan, “Life is On”, is befitting of a company manufacturing equipment for energy management, industry automation products and electric car charging systems that drive the sustainable movement.
But is it worth buying Schneider Electric stock? And what exactly makes the company so sustainable?
Read on, as we analyse the company from both financial and sustainability perspectives.
The Speed Read:
1. Despite the Covid-19 uncertainty, Schneider Electric was able to end 2020 with a record high gross margin and free cash flow, while maintaining the same profit margin level as the previous non-crisis year. In other words, it’s a resilient company.
2. Its stock has performed very well since it first went public, offering high returns for investors. It is also expected to grow in the future.
3. The company strives to work towards energy transition and clean energy access for all, based on a long-term 2050 vision.
Understanding the background: Schneider's story
So, what is Schneider Electric?
In general terms, the company addresses the needs of homes, commercial buildings, data centres, civil infrastructure and industry, and does so by combining energy technologies, real-time automation, software and services.
Its predecessor, Schneider & Cie, was founded by two brothers — Adolphe and Eugene Schneider — in France 1836. The company quickly became one of France’s most important industrial companies branching into a variety of machinery and steel operations.
After WWII, Schneider & Cie was restructured as a holding company with three operating units split into subsidiaries: civil and electrical engineering, industrial manufacturing, and construction. Over time, the Schneider Group expanded through several acquisitions and started entering the electrical industry more and more, slowly divesting from steel.
In May 1999, the Schneider Group was officially renamed Schneider Electric to clearly identify its expertise in the electrical field. Now, Schneider is a publicly-traded Fortune Global 500 company operating in over 100 countries and employing 135,000+ people.
But what exactly does the company do?
SE centers around two core offerings: energy management and industrial automation.
The energy management offering encompasses low and medium voltage products, as well as secure power segments. Low voltage products provide residential and commercial buildings with protection functions, power controls and electrical enclosures. In the meantime, medium voltage products and software include switchgear, transformers, electrical network protection, and automation control. Secure power specializes in critical power products for data centers and networks where power quality is essential.
Industrial automation provides smart solutions in the form of software and products for machinery used in manufacturing and other industrial plants, such as distributed control systems, safety systems, machine and process control, and human-machine interface.
The energy management segment generates nearly 80% of the company's revenue and industrial automation accounts for more than 20%.
But that’s not it!
Schneider Electric also operates as a research company, with a total investment of €10 billion in innovation and R&D for sustainable development between 2015 and 2025. The company invests 5% of its annual revenue in R&D.
Sounds good. But is it worth buying the Schneider Electric stock?
Schneider Electric holds one of the top positions in Cooler Future’s portfolio which has been constructed based on our impact-first approach and designed for climate-conscious investors.
But what exactly makes Schneider Electric a profitable investment?
To answer this question, let’s have a deeper look at the Schneider Electric stock over the past 30 years:
Over this period, its stock price has risen 231% — or 3.9% annualised. With dividends reinvested, investors would have even made a return of almost 803%, or 7.3% annualised.
That is great — and it gets even better:
Unlike most companies, SE did not experience a big drop during the onset of the Covid-19 pandemic in March 2020. In fact, the company recovered extremely quickly and is up 40% over its pre-pandemic share price. This indicates that Schneider Electric has a resilient business model while also playing a key role in the transition to net zero, therefore having great potential to grow further. When looking at financials, investors can see that, despite the uncertainty, Schneider Electric was able to end the year with a record high gross margin and free cash flow while maintaining the same profit margin level as the previous non-crisis year.
Schneider Electric's in-depth stock analysis
Because the stock price graph doesn’t tell you everything about the profitability of your investment, it’s crucial to take valuation and risk metrics into account. So let’s first talk about its debt and liquidity situation under the Structure section:
Current ratio (Curr Ratio) is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year with liquid assets, such as cash or money market instruments. It’s calculated by dividing current assets by current liabilities. In the case at hand, it gives 1.4 — which indicates that Schneider has enough liquid resources to remain solvent in the short term.
Debt/Assets is a leverage ratio that defines the total amount of debt relative to assets owned by a company. With 21%, only a relatively small portion of all assets owned by Schneider are financed by leverage. In turn, a greater proportion is funded by equity.
Finally, EBIT/Total Int Exp (total interest expense) is used to determine how easily a company can pay interest on its outstanding debt. 24.5 is a very good indicator that SE is able to pay interest on debt with ease. SE is therefore able to return a significant portion of the cash it generates back to investors in the form of dividends after paying its interest obligations. In fact, its dividend payout ratio (Dvd P/O) is 69.3%, which means that roughly 70% of its net income is paid out to shareholders as dividends.
Schneider Electric share price forecast
One common measure to value companies is to look at the P/E ratio (i.e. price to earnings). This ratio shows you how many years of earnings the share is costing you and therefore indicates whether a company is likely to be over- or undervalued. For Schneider Electric, the P/E ratio gives a value of slightly over 33, which means that the price for a share is 33 times SE’s annual earnings. This might indicate that investors expect higher earnings in the future, i.e. SE is a growth stock, meaning it is projected to have the potential to outperform the market over time due to its future potential.
However, this ratio is calculated with historic data, and can, therefore, be misleading.
In order to avoid this, it makes sense to go one step further and take the forward-looking P/E ratio into account. Doing this, we notice that it is actually slightly lower than the current P/E ratio. This is most likely due to the fact that current earnings (2020) experienced a decline during the Covid-19 pandemic causing the current P/E ratio to be higher. With earnings expected to recover, the forward P/E ratio is then expected to normalise.
How does Schneider compare to its peers?
To be coherent, let’s now examine how Schneider Electric performs compared to its peers, such as Siemens, Hubbel, Fastned, Eaton, ABB, and CGN Power.
- As Schneider’s current P/E (33.3) is higher than the median P/E (29.7), Schneider is relatively overvalued compared to its peers.
- The estimated P/E ratios for the next two years are dropping for all peers, indicating that future earnings are expected to increase as demand continues to pick-up at the tail-end of the pandemic.
- The Price-to-Book ratio compares a company’s market value to its asset’s book value. As for Schneider Electric, it is slightly lower than the median, suggesting that the company is slightly undervalued and therefore potentially a more attractive investment.
At Cooler Future, we are optimistic that Schneider Electric will pay off in the future. This is due to several reasons:
- Schneider performed very well since it first went public, offering high returns for investors and proving to be resilient during pandemic times.
- Schneider Electric’s cash generation ability, as well as its debt situation, appears healthy to us.
- Many companies are seeking economic recovery on a green standard. Schneider Electric has a strong R&D focus on energy and environmental solutions which provides them with a competitive advantage in the post pandemic world.
So it's a great stock. But is it sustainable?
Schneider Electric wants to supply solutions that span from buildings to industry, from cities to data centers, to drive energy to do more with less, ensuring “Life Is On” everywhere, for everyone, at every moment. We agree with Schneider’s view that there are two rapid mega trends, electrification and digitalization, in the global energy landscape. With these in mind, Schneider Electric wants to provide the world with a way to equip energy-poor populations with access to energy while also fighting climate change at the same time.
Awesome, but how exactly do they plan on achieving this? Here’s how:
- Be carbon-neutral in the group's operations by reducing CO2 emissions with energy efficiency, renewables and electrification by 2025.
- Reach net-zero operational emissions and reduction of Scope 3 emissions by 35% (vs 2017), as part of the Science-Based Targets initiative, to reach 1.5°C and align with Paris Agreements by 2030.
- Consume 100% renewable electricity, double energy productivity, switch to 100% electric cars and provide access to energy for an additional 80 million people by 2030.
- Become carbon neutral on full end-to-end footprint (Scopes 1, 2 and 3) by 2040.
- Engage all suppliers towards a net-zero supply chain (no C02 offsets) by 2050.
But, that’s not all. Schneider Electric also set some climate positive & more tangible milestones for the upcoming years. Let’s have a look at what this is about:
In 2005, Schneider started to align their business practices with their very own scorecard, called Schneider Sustainability Impact (SSI), which is updated every three years. Having followed a clear action plan over the past 15 years, they strive to work towards energy transition and clean energy access for all, based on a long-term 2050 vision.
Schneider developed 21 initiatives in order to support the UN SDGs (Sustainable Development Goals). By tracking their performance in all matters related to sustainability and ethical business practices, they want to become an industry leader in corporate social responsibility.
So, the 2021 – 2025 SSI is a collection of several sustainability goals, grouped under six megatrends.
It’s great to see that Schneider sets some ambitious climate objectives to attain over the next few years. But what exactly did they already achieve over the past years? Let’s have a look on what they’ve accomplished:
Schneider Electric is a supporter of the Task Force on Climate-related Financial Disclosures (TCFD) in the electrical equipment industry and one that sets decarbonisation targets approved by the Science-Based Targets initiative to keep the company’s operation aligned with the Paris Agreement. As stated above, Schneider aims for a 1.5°C goal by 2030.
Let’s have a look at Schneider’s SSI’s for the time period 2018-2020 and mark two significant accomplishments:
While having the International Energy Agency’s 2-degree scenario focusing on digitalization and decentralized energy in mind, Schneider developed a sustainability portfolio of product offerings that targeted 75% of revenue from green solutions and services by 2020 (Point 5).
To reach their climate goals, Schneider plans on decarbonizing and transforming energy efficiency. For this, they are mostly utilizing their “EcoStruxure Platform” which is the fundament on which all technological solutions are built (Point 3). They are providing their customers with:
- EcoStruxure Energy & Sustainability Services including climate change mitigation, supply chain decarbonization, environmental, social, and corporate governance reporting, and sustainability certification.
- Strategic procurement programs including traditional and renewable energy, distributed energy resources, microgrids, global Energy Attribute Certificates, and carbon offsets.
- Enterprise efficiency consulting and performance contracting to measure, manage, and reduce energy and resource consumption.
- Enterprise-wide energy and sustainability data collection, with integration into their AI-enabled EcoStruxure Resource Advisor software platform.
Sounds convincing, right?
Let’s look at the numbers more closely:
Schneider's EcoStruxure platform has saved clients 134 million metric tonnes of CO2 in 2020, up from 89 million in 2019!
In terms of resources, they want to advance a more circular economy by:
- Reducing the use of raw materials;
- Reusing or increasing, when possible, the share of recycled raw materials;
- Repairing by offering maintenance and modernization services for certain ranges of their products;
- Recycling via the services they offer in the end-of-life phase of products.
Of course, there’s even more to highlight. At this point, however, it’s important to stress the immediate impact Schneider has created in terms of emission avoidance and reduction:
- In 2019, Schneider managed to save and avoid 200 MT CO2.
- In 2020, estimations suggest saved and avoided emissions of even 280 MT CO2.
- Until 2025, they want to save and avoid an additional 800 MT CO2.
So, to sum up, Schneider is clearly showing efforts towards clean energy technology initiatives and emission management. Actually, ESG ratings even show that they are (continuously) outperforming their peers!
- Schneider shows growth potential when it comes to clean technologies as they are strong in energy management and automation solutions with a total of 72% of 2020 revenue being green revenue!
- Next to this, Schneider is partnering with their customers on their sustainability journey. Now, green businesses make up more than 70% of their business.
- The company also has a balanced governance structure, with an independent majority, striving for gender diversity and inclusion, as well as a strong anti-corruption conduct.
Currently, Schneider Electric shows low exposure to the risk of encountering major environmental and sustainable controversies.
Food for thought:
Achieving the 1.5°C temperature goal requires companies across industries to transform their business models and transition their offering towards low-carbon solutions. The future sustainability and climate performance of companies like Schneider Electric depends on how well-prepared and committed they are to transition the business towards green revenue generation. The share of a company's revenue coming from green or clean technologies, or the portion of revenue being invested in sustainability- and clean technology-related research and development can serve as indicators for preparedness. In addition to reducing emissions, companies can show their commitment by linking remuneration to climate-related performance indicators, disclosing their plans to increase share of green revenue as well as by increasing their positive environmental impact.
Schneider Electric & green finance
At its simplest, green finance is any financial activity, such as loans, debt instruments and investments, that are created to ensure a better environmental outcome.
In November 2020, Schneider Electric issued its first Sustainability-Linked Bond (SLB) with a nominal value of €650M, due in 2026. The net proceeds of the offering will be used by the company for general corporate purposes. In addition, Schneider Electric’s zero-coupon SLBs are convertible into shares and incorporate both social and environmental targets. The initial conversion or exchange ratio of the bond is one share per bond with a nominal value set at €176.
Schneider Electric attached financial risk to the completion of its ESG goals. That means that missing sustainability targets would actually see the company incur a financial penalty to the benefit of bond holders. The failure by Schneider to meet the average sustainability performance score by December 31, 2025, will consequently induce the group to pay an amount equal to 0.50% of the face value. The sustainability performance score is the arithmetic average of the following three KPIs:
- Climate: deliver 800 MT of saved and avoided CO2 emissions to our customer.
- Equality: increase gender diversity.
- Generation: train one million people in energy management.
With this in place, SE ensures that there is enough incentive to achieve the KPIs until 2025.
Conclusion: Is the Schneider Electric stock worth buying?
As we come to an end, what do we conclude from the analysis at hand? Is it worth investing in Schneider Electric, both from a financial and a sustainability perspective?
At Cooler Future, we think so. Mainly, due to the following reasons:
Their growth outlook is heavily influenced by accelerating digitalisation and electrification demand, which is growing as time proceeds. Next to this, recognising the importance of the two megatrends is indispensable to create a sustainable future where access to energy and digital should be provided to everyone.
Aside from good performance metrics and stable returns, Schneider is presented with a lot of opportunities in the post pandemic market, as a green economic recovery inherits huge growth potential for the company. Its strategy and positioning is well oriented to drive strong and profitable growth across the economic cycle.
Finally, Schneider has very ambitious climate targets in place and has created incentives to attain them over time. On the basis of their SSIs, they plan on achieving net zero until 2040.
Clearly, SE strives to be a diverse, inclusive and equitable company. To this end, SE prioritizes boosting a high performance and innovation culture. Not only do they offer high returns for their investors, but they are also aligned with the Paris Agreement.
To put it in a nutshell, if you are looking for a company to invest in, which is leading the way in supporting the green revolution, Schneider Electric is definitely worth considering. Invest easily with Cooler Future, a carefully curated investment portfolio of climate pioneers like Schneider Electric that promise both financial return and high climate performance.
Investments are associated with risks. The value of your investment can fall or rise and the capital invested may be lost. Past performance is not an indicator of future results. This information is for illustrative purposes only and is not investment advice.