Gates Industrial Corporation PLC (GTES) A Bull Case Thesis

We saw a bull thesis on  Gates Industrial Corporation PLC (GTES) on ValueInvestorsClub by nassau799. VIC is our preferred site because the ideas there are generally posted by aspiring analysts who try to optimize their research. We find the ideas presented on the site well thought out and worthy of a read. Click here for the full article. Below we summarized the GTES bull thesis.

Introduction

The Denver, Colorado-headquartered GTES is originally a tire and rubber company with roots 110 years old. Post advanced invention of the V-belt by one of the promoters, the company has remained the largest manufacturer of V-belts and material technology. After series of acquisition by bigger players, Blackstone – the last owner – took GTES public in early 2018.

Businesses

GTES has two main segments; Power Transmission (64% of sales) and Fluid Power (36% of sales). With the former having a leading market share globally with strong margins, and the latter being considered as one of the top players, GTES enjoys a dominant position among its global peers. Armed with the right product mix, the company is well-positioned to partake in the growth of hybrid and fully electric vehicle market. Its products are essential to the operation of the machines and vehicles in which they are used.

Analyst’s Outlook and Price Target

GTES’ business truly international and therefore its sales are meaningfully in sync with global industrial production. The analyst believes with the management’s 24% EBITDA target is achievable as the company is already registering high EBITDA of 21%. GTES runs a low capital-intensive business with strong free cash flow.

The company should be able to reduce its debt of $2.1 billion to less than 3x the EBITDA ($655 million currently) by the end of 2021. That would give it more fire power for any new accretive acquisitions, a potential dividend or a stock buyback. Despite a good show lately, GTES is still trading below its IPO price in 2018. Street’s cognizance of the undervaluation of GTES could take its stock to around mid-20s– a 30-40% upside from current levels within next couple of years.

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