Schindler's Slippery Slope: Valuation Risks and Regional Headwinds Undermine Growth Hopes

Morgan Stanley's downgrade of Schindler Holding AG (SCHN) to “underweight” in February 2025 underscores a growing divide between the capital goods giant's premium stock price and the reality of its underlying risks. The brokerage's skepticism centers on three pillars: an overvalued stock, vulnerabilities in key markets like China and the Americas, and doubts about the sustainability of growth in its Services and Modernization segments. For investors, the question is whether Schindler can justify its lofty valuation—or if it's time to reassess its risks.

A Valuation Bubble?

Schindler's shares have soared 19% year-to-date, but its valuation now sits at a 46% premium to its European capital goods peers on a 12-month forward EV/EBIT basis—a stark contrast to its historical average of just 15%. This overvaluation is perplexing given the company's recent performance. While Schindler reported a record 2024 net profit of CHF 1 billion and improved EBIT margins to 11.3%, its full-year revenue declined 2.2% in local currencies, with Q4 revenue dropping 3.5% in Swiss francs.

Morgan Stanley argues that the stock's premium is unsupported by fundamentals. The brokerage's price target of CHF 266—a 15% discount to current levels—reflects its belief that the market has overestimated Schindler's ability to navigate slowing demand and competitive pressures.

Regional Headwinds: China's Property Slump and Americas' Stagnation

Schindler derives 40% of its revenue from China and the Americas, regions now grappling with structural challenges. In China, the property market's prolonged slump—annual declines in sales and construction activity have persisted since mid-2021—has hit new elevator installations hard. Analysts expect a more than 10% decline in Chinese installations in 2025, a stark reversal from the double-digit growth of the past decade.

The Americas face subtler but persistent headwinds. While new installations are projected to decline less than 5% in 2025, North American markets are oversupplied with elevators, reducing demand for new projects. Compounding these issues, Schindler's order backlog remains flat, leaving little room for near-term revenue growth.

Services and Modernization: Growth That Doesn't Add Up

Schindler's Services segment, which accounts for over 90% of its EBIT, faces rising competition from Independent Service Providers (ISPs) and private equity-backed rivals. These firms are undercutting margins with lower-cost offerings, a trend that has already eroded Schindler's market share in key regions.

Meanwhile, Modernization—a newer segment focused on retrofitting outdated elevators—has grown but remains discretionary. Unlike the non-discretionary demand during China's construction boom, modernization projects depend on building owners' willingness to invest, making growth less predictable.

Morgan Stanley questions whether Modernization can offset the pressures on traditional services. The segment's project-based model also limits scalability, leaving profitability vulnerable to cost overruns.

Strategic Moves vs. Structural Challenges

Schindler has introduced initiatives like a standardized modular platform and leadership changes in Asia Pacific (with Nitin Chalke taking over in July 2025). However, these moves are unlikely to address the core issues of overvaluation and slowing demand. The company's dividend yield of 2.3% (CHF 6 per share) offers little comfort given the risks.

Investment Implications: A Premium Too Far

Schindler's stock trades at a valuation that assumes flawless execution in an uncertain environment. The combination of stretched multiples, China's property malaise, and a services segment under siege suggests the premium is unsustainable. Investors should heed Morgan Stanley's warning: the risks now outweigh the rewards.

The Takeaway: Schindler's shares have outperformed peers for years, but the pendulum is swinging back. With limited upside to consensus estimates and material downside risks, the stock is best approached with caution. For now, underweight allocations make sense—unless Schindler can prove it can defy the headwinds.