Gates Industrial (GTES): Buy or Hold?

A possible recession in the second half of this year may impact on the growth of the auto industry. Auto parts companies, despite being closely associated with the auto industry are not affected by a recession. Buying Gates Industrial stock (GTES), a fundamentally strong auto part company, could be a wise investment. Read more ....

The auto industry had a disappointing 2022, as disruptions in supply chains, high inflation and rising interest rates caused a drop in sales. Last year, the sale of light vehicles in the United States fell to its lowest level since 2012. The previous year saw the sale of over 13.75 million light cars, which represents a decline from 8% to 10%.

Auto parts are not affected by the economic cycle, and the auto industry's ups and downs do not have a significant impact on their demand.

The auto parts industry is not affected by a recession. Considering these factors, it may be wise to buy Gates Industrial Corporation plc's (GTES) stock which is fundamentally sound.

This article discusses several reasons for why you should buy stock right now.

According to Cox Automotive's forecast, the number of new vehicles sold in 2023 will increase by 3% over last year to 14,20 million units. Auto parts companies are only partly dependent on vehicle sales to grow, but the increased sales of new vehicles will benefit the entire industry.

Fed officials predicted a mild recession for the end of this year. In a downturn, people prefer to maintain and repair their vehicles than buy new ones. This increases the demand for auto components. The auto parts industry is therefore relatively recession-proof.

GTES did not exceed the consensus revenue and EPS estimates for the first quarter. Its EPS was 3.6% lower than analyst estimates while its revenue fell 0.8% short.

GTES CEO Ivo Jurek stated, "We managed to manage through a cyber attack on the organization while generating solid profitability growth in an operating environment which remained challenging." I am proud to say that our Gates Associates around the globe have delivered results that are above the midpoint in our guidance.

The board of directors of the company announced recently that it has authorized a stock repurchase program up to $250,000,000. This authorization is valid until October 2024.

The company has set a target of an EBITDA adjusted between $700 and $750 millions for fiscal 2023. The company expects its core revenue to increase between 1% and 5 percent, and that its adjusted EPS will be between $1.13 to $1.23. The company expects its conversion of free cash flow to be around 100% and that the capital expenditures for the entire year will be about $100 million.

GTES stock closed the last trading day at $13.53, up 18.6% year-to date and 12.8% in the past year. Wall Street analysts predict that the stock will reach $16 within the next 12 months. This would represent an 18.3% potential increase.

What could affect GTES' performance over the next few months?

Robust Financials

GTES's net sales increased by 0.5% over the prior-year quarter to $897.70 millions for the first three months ending April 1, 2023. Gross profit increased 6.6% from the previous quarter to $325.10 millions. Net cash generated by operating activities was $52.50m, compared with $105.40m in the prior quarter. The company's adjusted EBITDA grew 11.3% from the previous quarter to $174.50 millions.

The adjusted EBITDA was 19.4% compared with 17.6% the previous quarter. The adjusted net income for the quarter was $72.80m and adjusted earnings per share were $0.25.

Favorable Analyst Estimates

Analysts predict that GTES' earnings per share (EPS) for fiscal 2023-2024 will increase by 4.1% and 14.7%, respectively, to $1.19 apiece and $1.36 apiece. Revenue for fiscal 2023-2024 is expected to grow by 2.5% and 3.5% respectively.

The company's earnings per share (EPS) and revenue are expected to rise by 0.9% and 3.1%, respectively, to $0.32 and $1,935.18 million.

Discounted Value

GTES' forward EV/EBITDA is 8.42x, which is 18.6% less than the industry average of 10.34x. The 13.41x forward EBIT/EV ratio is 8.1% less than the industry average of 14.60x. Its 1.06x price/sales ratio is 17.1% less than the industry average of 1.28x.

High Profitability

GTES' 35,79% gross profit margin for the 12-month trailing period is 19,9% higher than industry average of 29,85%. The 18.28% EBITDA trailing-12 month margin is 38.7% greater than the average industry of 13.18%. The stock's trailing 12-month FCF margin of 10.04% is 97.7% greater than the industry-average of 5.08%.

Solid Growth

GTES's EBIT has grown at a CAGR 10.7% in the last three years. Over the last three years, its net income has grown at a CAGR 24.5%. EPS also grew at a rate of 25,4% over the same period.

The POWR Ratings are promising

GTES's overall rating is A, which equates to a Strong Purchase in our POWR ratings system. POWR Ratings is calculated by weighing 118 factors to the optimal degree.

We also rate each stock according to eight different categories. GTES's Value grade is B, which is consistent with the discounted valuation.

It is a B-graded company for quality, and it has high profitability.

GTES ranks first among 60 stocks within the Auto Parts Industry. Click here to view GTES' ratings in terms of Growth, Momentum and Stability.

Bottom Line

GTES stock is currently trading above the 50-day and200-day moving averages, which are $13.47 and 12.16 respectively. This indicates a positive trend. The company anticipates a strong growth rate in fiscal 2023, despite an uncertain macroeconomic climate.

It could be a good idea to purchase the stock given its strong financials, favorable estimates, high profitability and discounted valuation.

How does Gates Industrial Corporation plc compare to its peers?

GTES has a POWR rating of A. This is equivalent to a Strong Purchase. Other stocks in the Auto - Parts sector with A ratings include JTEKT Corporation, Garrett Motion Inc. and Continental Aktiengesellschaft.

This is why Steve Reitmeister, a 40-year investment veteran, has created a timely presentation that includes a trading strategy and his top picks.

GTES shares traded at $13.57 a share in the morning of Monday, an increase of $0.04 (+0.30%). GTES shares have risen 18.93% year-to-date compared to the S&P 500 benchmark index, which has risen 7.90%.

About the Author: Dipanjan B.

Dipanjan has been interested in stock markets since he was in elementary school. Dipanjan obtained a Master's Degree in Finance and Accountancy. Dipanjan is a financial journalist and investment analyst. He has a keen interest in reading about and analyzing new trends in the financial markets.