In markets where the winner takes all, there's only one company worth buying

Telegraph

2 days ago

Questor is The Telegraph's stock-picking column, helping you decode the markets and offering insights on where to invest.
Market leadership can be a huge advantage in business. Dominating a market allows a company to outspend its rivals in areas that drive sales, such as marketing and product innovation. Meanwhile, scale can lower the cost of making goods, providing services and distribution.
Once businesses establish leadership, they often command significant 'pricing power' because customers have few viable alternative sources of supply – a particularly good characteristic to have with the threat of tariffs looming.
The markets that best lend themselves to fostering leaders tend to be niches as they are only big enough to support limited numbers of players, which accelerates the winner-takes-all dynamic.
French buildings product and services company Legrand has a keen appreciation of this. It describes itself as 'a giant in profitable niches' and says two thirds of sales come from markets in which it boasts a number one or two leadership position.
The pricing power this gives the group was underlined during rampant inflation earlier this decade. Between 2019 and 2023 the group matched cost increases with price rises of 23pc, while managing to achieve annualised sales growth of 9.2pc. Meanwhile, Legrand is confident it can mitigate an expected $150-to-200m tariff hit though price increases coupled with savings and supply chain changes.
The company's strong competitive position is reflected in a record of dividend growth every year since its 2006 Paris IPO. British buyers of the shares, which are available through major brokers, need to fill out the correct paperwork to minimise withholding tax and should check for additional dealing costs.
Legrand sells digitalisation and electrical products and services to the construction industry. It offers a vast array of products including cabling, lighting, EV charging and datacentre kit, to name a few.
It supports its competitive position with solid research and development spending, averaging about 5pc of sales, and boasts a huge network of third-party distributors and installers across 180 countries. Its most important geographies are Europe and the Americas, which account for just over two fifths of sales each.
Legrand also taps into long term megatrends – the energy transition is driving demand for electrification and energy-efficiency solution, a housing shortage and aging population in developed economies is benefiting digitisation. Plus, the recent surge in spending on AI has powered a sharp rise in datacentre demand, which the company expects to account for 20-to-25pc of sales this year.
Just under half of sales are exposed to what the group defines as its higher growth markets and brokers forecast annualised sales increases for the group as a whole of 6.5pc for the next three years. However, an appetite for acquisitions and plans to spend €5bn on deals between 2025 and 2030 could boost growth further.
One of the problems with targeting niche markets is that, by definition, they are not big, which limits growth. Legrand's solution to this is to make many small acquisitions that consolidate its dominance and moves it into attractive adjacent markets. It estimates 60pc of sales in its higher growth operations are acquired.
The businesses Legrand buys tend to have lower margins than its own operations, which is unsurprising given the benefits to profitability that leadership and scale brings. However, the group's impressive operating margin of just over 20pc is expected to remain stable in the coming years as Legrand consistently grinds out new savings from recent acquisitions and existing operations.
The business model and growth prospects resonate with many of the world's best fund managers, and 11 of these individuals, all identified as among the top-performing 3pc of equity managers globally by financial publisher Citywire, hold shares in Legrand. The high level of smart money interest results in Citywire awarding the company its highest Elite Companies rating of AAA.
While leadership in niche markets coupled with strong brand recognition and reputation underpins demand, the company's fortunes are unavoidably linked to the health of the construction industry globally. Currently, the rampant growth from datacentres is offsetting weakness elsewhere, particularly Europe. While management has yet to see any clear signs of a recovery in Europe, it expects a pickup towards the end of 2025.
If a recovery can add to the tailwind from the AI boom, there is room for the shares rating to improve based on the current valuation of 21 times forecast next year's earnings, but expectations for ongoing, profitable growth should provide momentum in its own right.