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Investment Insight Series – Cyclical Franchise example: Schneider Electric

Investment Insight Series

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We’ve taken an introductory look at the characteristics Sarasin use to classify companies under consideration for investment and explored the examples of defensive franchises and disruptive growth businesses. The next category is cyclical franchises. Our example from within the Sarasin portfolio is Schneider Electric, the global specialist in energy management and automation.

Here’s the description we shared of a typical cyclical franchise: 

  • These businesses are also generally market leaders with high barriers to entry, like the defensive franchises.
  • They create value over a full economic cycle, but a degree of cyclicality means they may not achieve this every year.

End market demand is variable and usually highly dependent on levels of economic activity.

Schneider drive digital transformation by providing energy and automation digital solutions for efficiency and sustainability. They combine world-leading process and energy technologies, to enable integrated company management, for homes, buildings, data centres, infrastructure and industries, empowering their clients to make the most of their energy and resources.

Schneider has transformed itself largely through mergers and acquisitions, to become the leading provider of productivity enhancement solutions. Its asset-light business model ensures it has the best in class speeds to market for innovation and technology.

Factors supporting the investment case for Schneider Electric include: 

Long-term opportunity for growth. The group is well positioned to benefit from thematic growth arising from efficiency within urbanisation, digitisation and energy conservation.

Industry structure. The market is fragmented and competitive but Schneider’s asset-light model is a positive differentiation.

Additional factors. With some 35% of its sales generated in Asia, Schneider has the greatest exposure to faster growing regions versus its peers.

Schneider’s products and services are targeting improved efficiency, increased health and safety and better productivity in their customers’ products and services. Sarasin would like to see management re-introduce returns on investment as a performance goal but deem the business to present a sound opportunity for investment.

Hopefully the example of Schneider gives an insight into the particular factors at play in a cyclical franchise, but these corporate characteristics are only one of the criteria Sarasin consider when approaching investment opportunities. Sustainability is at the core of Schneider’s strategy. They hold themselves accountable to the benchmarks set by the UN’s Sustainable Development Goals (SDG) and have committed to achieving a climate-positive impact through their development of decarbonisation and a circular economy approach.

As experts in the responsible investment arena, Sarasin actively engage with the businesses within their portfolios through an ongoing screening process – their high thresholds must be consistently met.  

Next time we’ll look at an example of a cash harvest business: Equinix Inc.