RBC upgrades Legrand to "sector perform" on improved outlook, raises PT to €113

Investing.com -- RBC Capital Markets in a note dated Monday upgraded Legrand (EPA:LEGD) to "sector perform," citing an improving outlook as construction headwinds ease and the company’s exposure to the fast-growing data center market expands.

The brokerage has also raised its price target for the stock to €113 from €87, reflecting a more favorable risk-reward balance for investors.

According to RBC analysts, Legrand had faced significant challenges in its core construction markets in Europe and North America over the past two years, leading to subdued demand. However, recent indicators suggest that these pressures have likely bottomed out.

Data from building materials shipments and lending surveys point to a gradual recovery, offering a more stable backdrop for Legrand’s construction-related business, which accounts for approximately 50% of total sales.

Meanwhile, the company’s push into data centers is becoming a key driver of growth. In 2024, data centers contributed around 20% of Legrand’s total sales, up from 15% in 2023.

This growth was fueled by 15% organic expansion, along with €240 million in acquisitions. RBC expects this momentum to continue in 2025, with the book-to-bill ratio remaining above 1x in every quarter of 2024.

If data center growth accelerates further, RBC estimates that every additional 5-percentage-point increase in this segment would contribute 90-100 basis points to overall sales growth.

Legrand’s financial performance has remained resilient despite market challenges. The company reported €8.65 billion in revenue for 2024, with a forecast of €9.44 billion in 2025, reflecting 9.1% year-over-year growth.

Its adjusted EBIT margin has remained stable, ranging between 19.0% and 21.0% since 2010, and is expected to hold at 20.5% in 2025. Free cash flow conversion remains a standout, reaching 110% in 2024 and averaging 115% since 2014, well above key industry peers such as Schneider Electric (EPA:SCHN).

Over the past four years, Legrand’s FCF conversion has outperformed Schneider Electric by an average of 18 percentage points.

Legrand’s earnings outlook also remains strong. Adjusted diluted EPS is projected to rise from €4.80 in 2024 to €5.10 in 2025, an increase of 6.3%. The company’s dividend per share (DPS) is expected to grow from €2.20 to €2.40, reflecting a 5.3% increase.

In terms of valuation, Legrand’s stock was trading at a 9% premium to RBC’s broader coverage universe at the start of 2024 but has since moved to a 1% discount.

RBC analysts argue that this shift, coupled with an improving growth outlook, presents a more balanced investment case.

At the revised price target, Legrand would continue to trade at a 10% discount to French peer Schneider Electric, which has higher growth rates but weaker cash conversion.

Regional performance forecasts indicate varying growth rates. In Europe, sales are expected to rebound by 1.9% in 2025, following a -2.2% decline in 2024.

In North and Central America, the company is forecasting 6.0% organic sales growth in 2025, while the rest of the world is expected to see 3.7% growth, slightly below previous estimates.

With cyclical pressures in construction moderating and the data center tailwind strengthening, RBC now sees reduced downside risks to Legrand’s earnings trajectory.