With close to half of its revenue coming from auto end-markets and the remainder from largely short-cycle markets, Gates Industrial Corporation (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.
Read more here:
Gates Industrial Can Be More Than A Short-Cycle Recovery Story
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