GrowthSpotting: The Art of Global Investing
This series cuts through market noise to explore a handful of what we believe are the most relevant and inevitable global trends for investors seeking growth.
These powerful subthemes take a closer look at what we think is a valuable framework for understanding growth drivers worldwide—our “MANTRA” (Mass Affluence, New Technology, Restructuring and Aging).
Today’s post focuses on: Powering the Cloud.
As we approach Christmas, I can’t help but notice how many of the goodies being advertised are mobile data devices such as smart phones, tablets, e-readers and cameras, to say nothing of mega-screen TVs that will be used for streaming movies. Each of these new devices will add geometrically to the deluge of digital information, which is expected to grow by a factor of 44 times in this decade.1
Nearly half of that data is expected to either live in or pass through “the cloud” (ie, the big warehouses of servers that store and transmit data).1 The implications for cloud capacity demand are clear and lead to opportunities in several industries in the value chain, one of which is power. These warehouses, with their racks and racks of high-speed servers, require tremendous amounts of energy. Worldwide, digital warehouses use about 30 billion megawatts of electricity, roughly equivalent to the output of 30 nuclear power plants.2 Furthermore, it must be carefully regulated and uninterrupted.
In our portfolio, we own a company that addresses this need. It is a French firm called Schneider Electric, and it is the world’s leading provider in the IT critical power and cooling space.3 It is also number one in the world by market share in the related medium voltage and grid automation portions of the power infrastructure markets.4 Much of the equipment Schneider produces is necessary to bring power “the last mile” from the local substation to the building. As more data warehouses are built, more of that equipment is needed too. Another key driver for this business is the development of “smart” power grids that use energy more efficiently. Developed economies are upgrading their existing power grids, and emerging markets are building out new power infrastructure altogether and installing “smart grid” equipment from the get-go. 5 Overall, Schneider has a unique portfolio combining energy measurement, low voltage and medium voltage equipment, and uninterruptible power products. 3
Schneider is on track to experience revenue growth of over 6.5% annually in the five years since 2007. During that period, it has delivered a 10%-12.5% return on invested capital in every year but 2009, when it returned 7.8%. This positive return on capital, right the way through the bottom of the business cycle, is something we like to see from companies. Gearing is moderate at 50%. Schneider stock has appreciated 34% this year and yet its dividend yield still tops 3%.6
- IDC, 5/10
- NYTimes, 9/22/2012
- Credit Suisse, 9/9/12
- Credit Suisse, 9/10/12
- Santander, 10/4/11
- Bloomberg, 12/3/12
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The mention of specific securities does not constitute a recommendation by any Oppenheimer fund or by OppenheimerFunds, Inc. Certain Oppenheimer funds may hold the securities of those companies mentioned.