On Friday, Wolfe Research upgraded Gates Industrial Corporation (NYSE:GTES) from Peer Perform to Outperform, setting a year-end 2024 price target of $20 per share. The firm highlighted the stock's significant potential for multiple expansion, driven by a recovery in growth and improvements in margins and free cash flow (FCF). Wolfe Research also noted the diminishing concerns over the Blackstone overhang as a diminishing risk factor.
The decision to upgrade Gates Industrial comes after Wolfe Research's 2024 Outlook for the Electrical Equipment/Multi-Industry (EE/MI) group, which anticipated a low-growth environment with inventory and backlog challenges in the first half of 2024. However, the firm also predicted a more dovish Federal Reserve and a recovery in industrial lead indicators, which could favor a shift towards cyclical short cycle stocks.
Gates Industrial's valuation was emphasized as one of the more attractive within the sector, trading at 7.7 times its estimated 2024 EBITDA and 11.0 times its price-to-earnings (P/E) ratio. In comparison, the Multi-Industry sector averages are significantly higher, at 17.3 times EBITDA and 23.2 times P/E. The firm believes that Gates Industrial is poised to benefit from relative multiple expansion as its growth trajectory improves through 2024.
Analysts' confidence in upgrading Gates Industrial was bolstered by a more positive outlook on the company's earnings, particularly in its mobile categories for 2024. Recent evidence of better margin and FCF execution, as demonstrated in the fourth quarter of 2023 earnings, also contributed to the optimistic stance. Additionally, the favorable market response to Blackstone's recent secondary sell-down of Gates Industrial shares indicated a growing investor interest. Blackstone remains a significant shareholder, still owning 28% of the company's equity, which is expected to be divested in further tranches over the next 9 to 12 months.
The upgrade precedes Gates Industrial's investor day, which is scheduled to take place in New York City. Analysts anticipate no substantial changes to the company's mid-term growth projections, including targets for EBITDA and earnings per share. The firm also expects updates on Gates Industrial's growth strategies, such as transitions from belt to chain, personal mobility, electric vehicle (EV) penetration, and opportunities in liquid cooling for data centers.
Wolfe Research's valuation framework for Gates Industrial remains conservative, accounting for growth inflection yet to materialize. The revised year-end 2024 target price of $20, up from the previous $15 fair value estimate, is based on a fiscal year 2025 EBITDA multiple of 9.5 times and a P/E multiple of 11.8 times, with a projected range between $11 and $24.