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Investing.com -- Goldman Sachs double-upgraded Schneider Electric (EPA:SCHN) stock to Buy from Sell on Thursday, citing improving fundamentals and an overdone market reaction to concerns around datacenter demand.
The Wall Street bank also raised its 12-month price target to €280 from €214, implying around 22% upside from current levels.
Schneider Electric shares rose less than 1% in European trading.
Goldman Sachs noted that when it initially downgraded the stock in 2019, it was concerned about high valuations and weaker returns. However, the environment has changed.
“The reported 2024 adj. EBITA was almost 50% higher than we had expected, with 2025E return on invested capital (ROIC) now likely to exceed the sector median this year on our estimates,” analysts Daniela Costa and Ilaria Buricelli wrote.
They see multiple catalysts for Schneider’s growth, including a recovery in its Low Voltage construction segment, which accounts for 33% of sales, and continued expansion in Medium Voltage and Datacenter-related businesses, representing 13% and 21% of sales, respectively.
Moreover, the analysts expect Schneider ROIC to surpass the sector median in 2025, for the first time in decades.
While the firm acknowledged a moderate setback in datacenter capital expenditure during the second half of 2024, it sees early signs of stabilization and expects strong order activity from hyperscale customers.
Schneider’s valuation has also adjusted in recent years. The stock’s 12-month forward EV/EBIT multiple has re-rated appropriately, but Goldman believes recent weakness is excessive.
“We believe the stock’s reaction to Datacenter capex-related concerns is overblown, with last month’s sell-off breaking down the historical relationship between returns and valuation,” the report stated.
The bank also highlighted Schneider’s improving capital allocation, noting that mergers and acquisitions accounted for more than 40% of free cash flow from 2000 to 2019 but have fallen below 30% in recent years. The company’s free cash flow conversion now ranks in the sector’s top quartile, with asset turnover steadily improving since 2020.
Schneider Electric is set to report first-quarter earnings on April 28, which Goldman Sachs sees as a potential catalyst for further gains. The bank remains ahead of consensus on its 2025-2028 EBITA estimates, expecting continued positive momentum.