Short-Cycle Sentiment Keeping Gates Industrial Locked Down

 

As I noted in my last update on Gates Industrial (NYSE:GTES), the market was starting to move off of short-cycle industrials as investors pursued greener pastures for growth. I had thought that stronger first and second quarter earnings and healthy guidance would maybe lead to some rethinking, but so far I was only half-right – Gates, and many other short-cycle names, reported better results, but it hasn’t changed sentiment and several quality short-cycle names have continued to weaken.

Basically flat since my last update, Gates still looks interesting to me on a long-term basis. I like the long-term opportunity in chain-to-belt transitions in multiple industrial markets, as well as the opportunity to leverage further growth in automation and a switch to electrification in personal transportation. Although I see pretty interesting return potential, I wouldn’t ignore that sentiment issue where short-cycle names as concerned, as fighting the tape is a tough way to try to make money.

 

Click the link to continue reading: 

Short-Cycle Sentiment Keeping Gates Industrial Locked Down

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

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