On Friday, Wolfe Research raised its rating for Gates Industrial Corp. (NYSE:GTES) from Peerperform to Outperform on the stock, setting a price target of $20.00. The firm anticipates that the upcoming Gates investor event will follow a similar structure to the one held in March 2022, focusing on growth initiatives, operational excellence, and capital allocation.
The analyst expects Gates to highlight growth opportunities in various sectors, including Electric Vehicles, where content penetration is key, the transition from Chain to Belt in the industrial sector, and personal mobility, despite current destocking headwinds. Additionally, Gates is likely to showcase the potential for its hoses and coupling solutions in the data center market as it shifts towards liquid cooling.
The company's Gates Production System is anticipated to be a central topic, with its quality improvement and complexity reduction measures aimed at driving margin expansion. The firm also foresees Gates discussing structural cost-out initiatives, such as material productivity and adjustments to its China footprint, which are expected to contribute to earnings per share this year.
Wolfe Research notes that Gates Industrial's EBITDA margin for 2023 is projected to be on par with 2021 levels, and management is likely to uphold its mid-term target of a 24% EBITDA margin, slightly above the 22-23% achieved in 2017/18. The company's target leverage is expected to remain at 1.5 times, with a focus on debt reduction and potential modest stock repurchases as Blackstone (NYSE:BX) sells down its remaining 27% stake in the company.
The firm concludes that while Gates Industrial may not introduce major changes to its standing mid-term framework, which includes a target for 24% EBITDA margin and $2 EPS, the explicit timing and commitment to these targets remain to be seen.
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