Gates Industrial Corp PLC GTES is a high-quality play on the current industrial recovery with an attractive valuation, an analyst at Morgan Stanley said.
The Analyst
Morgan Stanley analyst Sawyer Rice initiated coverage of Gates Industrial with an Overweight rating and a $24 price target.
The Thesis
Gates Industrial has an attractive business model of addressing markets with high cost of downtime, helping it achieve 40 percent gross margin and 22 percent EBITDA margins, Rice said in a note. The fact that 64 percent of the company's revenues are driven by replacement market reduces cyclicality, the analyst added.
Rice sees the company's exposure to the industrial, agriculture, mining and oil & gas markets as providing good leverage to the current industrial recovery. As such, the analyst sees no signs of a near-term downturn.
"We recognize that automotive markets are slowing, but Gates' primarily replacement portfolio should benefit from the aftereffects of the MSD growth we've seen over the last 5 years," Morgan Stanley said.
The firm sees delivering and acquisitions as potential catalysts for shares.
The Price Action
Gates Industrial shares closed Friday's session at $18.29, off their IPO price of $19 and the $18.50 at which they closed the debut session on Jan. 25.
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