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Gates Industrial (GTES): Buy or Hold?

A likely recession later this year could impact the auto industry’s growth. Despite being closely related to the auto industry, auto parts companies are relatively unaffected by a recession. Therefore, buying fundamentally strong auto parts stock Gates Industrial (GTES) could be wise. Read more…

2022 was a disappointing year for the auto industry as supply chain disruptions, high inflation, and rising interest rates led to a decline in the sales of light vehicles. The sale of U.S. light vehicles fell to their lowest level since 2012 last year. Over 13.75 million light vehicles were sold the previous year, representing a year-over-year decline of 8% to 9%.

The auto parts industry is not entirely dependent on the sales of new vehicles, making them exciting investment options during different economic cycles, as the ups and downs of the automobile industry do not significantly affect the demand for auto parts.

While a recession can affect the automobile industry, the auto parts industry remains largely unaffected. Given these factors, buying fundamentally sound auto parts stock Gates Industrial Corporation plc (GTES) could be wise.

In this piece, I have discussed several reasons why it could be wise to buy the stock now.

According to Cox Automotive, new-vehicle sales for 2023 are forecasted to increase 3% year-over-year to 14.20 million units. Although auto parts companies only partially rely on new-vehicle sales for their growth, the increase in new-vehicle sales is expected to benefit the industry.

The Fed officials forecasted a mild recession later this year. In a recessionary environment, people usually prefer to repair and maintain their existing vehicles rather than purchase new ones, increasing the demand for auto parts. This makes the auto parts industry relatively recession-proof.

GTES failed to surpass the consensus EPS and revenue estimates in the first quarter. Its EPS came 3.6% below analyst estimates, while its revenue fell short of the consensus estimate by 0.8%.

GTES’ CEO Ivo Jurek said, “We generated solid profitability expansion in an operating environment that remained challenging and while managing through a cybersecurity attack on the enterprise. I am proud of our Gates associates around the world for their resilience and perseverance in delivering results above the midpoint of our guidance.”

The company recently announced that its board of directors authorized a share repurchase program of up to $250 million, and the authorization will be valid through October 2024.

For fiscal 2023, the company guided for an adjusted EBITDA of between $700 million and $750 million. Its core revenue is expected to grow between 1% and 5%, while its adjusted EPS is expected to come between $1.13 and $1.23. It expects its free cash flow conversion to be approximately 100%, and the capital expenditure for the whole year is expected to be approximately $100 million.

GTES’ stock has gained 18.6% in price year-to-date and 12.8% over the past year to close the last trading session at $13.53. Wall Street analysts expect the stock to hit $16 in the 12 months, indicating a potential upside of 18.3%.

Here’s what could influence GTES’ performance in the upcoming months:

Robust Financials

GTES’ net sales increased 0.5% year-over-year to $897.70 million for the first quarter ended April 1, 2023. Its gross profit rose 6.6% over the prior-year quarter to $325.10 million. Its net cash provided by operating activities came in at $52.50 million, compared to net cash used in operating activities of $105.40 million in the year-ago quarter. Its adjusted EBITDA increased 11.3% over the prior-year quarter to $174.50 million.

Its adjusted EBITDA margin came in at 19.4%, compared to 17.6% in the year-ago quarter. Its adjusted net income and adjusted EPS came in at $72.80 million and $0.25, respectively.

Favorable Analyst Estimates

Analysts expect GTES’ EPS for fiscal 2023 and 2024 to increase 4.1% and 14.7% year-over-year to $1.19 and $1.36. Its fiscal 2023 and 2024 revenue is expected to increase 2.5% and 3.5% year-over-year to $3.64 billion and $3.77 billion.

Its EPS and revenue for the quarter ending June 30, 2023, are expected to increase 0.9% and 3.1% year-over-year to $0.32 and $935.18 million, respectively.

Discounted Valuation

In terms of forward EV/EBITDA, GTES’ 8.42x is 18.6% lower than the 10.34x industry average. Its 13.41x forward EV/EBIT is 8.1% lower than the 14.60x industry average. Likewise, its 1.06x forward Price/Sales is 17.1% lower than the 1.28x industry average.

High Profitability

In terms of the trailing-12-month gross profit margin, GTES’ 35.79% is 19.9% higher than the 29.85% industry average. Likewise, its 18.28% trailing-12-month EBITDA margin is 38.7% higher than the industry average of 13.18%. Furthermore, the stock’s 10.04% trailing-12-month levered FCF margin is 97.7% higher than the industry average of 5.08%.

Solid Historical Growth

GTES’ EBIT grew at a CAGR of 10.7% over the past three years. Its net income grew at a CAGR of 24.5% over the past three years. In addition, its EPS grew at a CAGR of 25.4% in the same time frame.

POWR Ratings Show Promise

GTES has an overall rating of A, equating to a Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. GTES has a B grade for Value, consistent with its discounted valuation.

It has a B grade for Quality, in sync with high profitability.

GTES is ranked first out of 60 stocks in the A-rated Auto Parts industry. Click here to access GTES’ ratings for Growth, Momentum, Stability, and Sentiment.

Bottom Line

GTES’ stock is trading above its 50-day and 200-day moving averages of $13.47 and $12.16, respectively, indicating an uptrend. The company expects strong growth in fiscal 2023 despite the uncertain macroeconomic environment.

Given its robust financials, favorable analyst estimates, high profitability, and discounted valuation, it could be wise to buy the stock now.

How Does Gates Industrial Corporation plc (GTES) Stack Up Against Its Peers?

GTES has an overall POWR Rating of A, equating to a Strong Buy rating. Check out these other stocks within the Auto – Parts industry with an A (Strong Buy) rating: JTEKT Corporation (JTEKY), Garrett Motion Inc. (GTX), and Continental Aktiengesellschaft (CTTAY).

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GTES shares were trading at $13.57 per share on Monday morning, up $0.04 (+0.30%). Year-to-date, GTES has gained 18.93%, versus a 7.90% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.


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