Thursday, May 4, 2017

A current AIM Fund holding: Schneider Electric ADR (SBGSY) by Kevin Blank. “Ready for 21st Century Challenges"

 Schneider Electric Unsponsored ADR (SBGSY, $15.79): “Energy in the Cloud”
By: Kevin Blank, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Schneider Electric (OTC:SBGSY) is a global specialist in energy management, electrical distribution, and industrial engineering equipment. The company offers integrated products and solutions across four markets (non-residential and residential buildings, utilities and infrastructure, industry and machine manufacturers, and data centers and networks).

• Schneider Electric is answering customer’s needs on how best to take advantage of today’s speedy digital world.

• The recent announcement of collaborating with Microsoft by using Azure in Schneider’s EcoStruxure architecture will accelerate the delivery of cloud-based applications. 

• Increased construction in Europe and North America can drive utility spending.

• The company is focused on disciplined value-accretive M&A to grow core business areas.

Key points: Schneider Electric’s market leader position in the key applications in distributed information technology, data centers, and non-IT applications creates long term drivers for growth. The company operates across 200 countries and growth areas include increased installed base for battery energy storage systems, internet traffic, edge computing IoT devices, and cloud data centers.

Cloud-based applications deployed by IT and automation companies drive plants, buildings, people and asset optimization. Partnering with Microsoft in addition to Accenture, Intel, Cisco, IBM, and Salesforce allows for significant upside in the IoT space. 45% of revenues relate to IoT. Schneider’s EcoStruxure digital platform delivers business value through apps, edge control, and connected products on-site and in the cloud. Demand for IT and business automation solutions continues to grow and Schneider’s total addressable market expanded from 60B euro to 300B euro.

The building business segment grew 3.8% in Q1 with China responsible for double-digit growth. Non-residential construction markets are a large influence for Schneider Electric. Europe and North America construction markets could have a strong 2017, increasing low voltage products and systems (switchboards, circuit breakers, cabling and interfaces) and medium voltage distribution (transformers). New trends in power generation are moving towards a technological evolution through microgrids, energy storage, and renewable energy.

Although M&A is not necessary, management has stated potential M&A to strengthen leading positions in the core business areas (power, building, and software). The company has also generated 1.4B euro in cash from disposals of non-core businesses.

What has the stock done lately?
SBGSY has hovered around $13 – $14 with a recent spike after Schneider Electric posted a positive 1Q17 sales report on April 20th, showing organic growth across all business segments. This news resulted in a 3.55% increase. April has been a strong month for Schneider with a $900M sale of DTN, a data software business that distributes real-time weather information to farmers and other customers. Schneider said proceeds from the deal will be used in a share buyback of about 1B euro and recover from other acquisitions. The month of April posted an 8.77% increase in share price.

Past Year Performance: The stock has increased 20.53% over the past year. The 52-week range is $10.92 - $16.15. Schneider posted $1.93B net income in 2016 which increased from $1.55B in 2015 although revenues decreased largely due to foreign currencies depreciating against the euro.

Source: FactSet

My Takeaway
The age of digitization in the energy markets is catching up globally and Schneider Electric’s end markets are becoming more electric, digitized, and automated. Schneider’s ability to partner with leading IT and automation companies increases their knowledge base in determining customer’s needs. System and solution engineers can integrate and design product capabilities with strong alliances. I expect Schneider Electric to continue to be a leader worldwide and strengthen core businesses through M&A.

Source: FactSet

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