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Gates Industrial Can Be More Than A Short-Cycle Recovery Story

Apr. 05, 2021 11:22 AM ETGates Industrial Corporation plc (GTES)1 Comment
Stephen Simpson profile picture
Stephen Simpson


  • Gates offers broad exposure to the auto and short-cycle industrial recovery, with additional upside from R&D-driven efforts to gain share, including replacing chains with belts in multiple industrial power applications.
  • Gates generates the bulk of its sales from products where it is among the share leaders and aftermarket revenue is a significant part of the business.
  • Margins are not exceptional and leverage is high, but management has been focusing on increasing its R&D productivity and the share of revenue generated by new products.
  • While the long-term return potential doesn't look exceptional, the shares do look relatively undervalued on above-average short-cycle sensitivity.

With close to half of its revenue coming from auto end-markets and the remainder from largely short-cycle markets, Gates Industrial Corporation (NYSE:GTES) should be well-placed for a strong recovery in 2021. To that end, management has already guided for revenue growth of 9% to 14%, with healthy EBITDA margins, as those markets come back to life.

What the company can do above and beyond cyclical recovery leverage will be a key factor in the longer-term returns for shareholders. Management has already produced some tangible benefits from its investments and reinvestments into materials research, and the opportunities to drive improved new product development and gain share in existing markets is real, but the company will also need to couple that with improved margins and reduced leverage.

I can’t call Gates a compelling idea on a long-term basis, but the stock does look more undervalued on a shorter-term margin/return-driven approach. The biggest risk I see there is that the market moves on from short-cycle names – something that has happened around this point in prior cycles, but those prior cycles didn’t involve a recovery from a global pandemic coupled with significant stimulus efforts.

Powering Back Up

Gates generates about two-thirds of its revenue from its Power Transmission business, a business largely based on providing various kinds of belts used in stationary drives, mobile heavy equipment, autos, and light personal vehicles (bikes, ATVs, etc.). A little less than half of this business is “first fit” (meaning it goes on original equipment), while the remainder is from aftermarket sales that aren’t quite as volatile.

Gates is one of those companies that focuses on products that aren’t individually all that expensive (many of its products cost in the hundreds of dollars or less), but are nevertheless mission-critical. Couple that with strong engineering capabilities that has led to products

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (1)

falconcraig profile picture
$19 was the IPO price in January of 2018...ho hum..
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