Over the past six months, Gates Industrial Corporation has been a great trade, beating the S&P 500 by 11.5%. Its stock price has climbed to $25.59, representing a healthy 19.6% increase. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Gates Industrial Corporation, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Gates Industrial Corporation Not Exciting?
We’re happy investors have made money, but we're swiping left on Gates Industrial Corporation for now. Here are three reasons you should be careful with GTES and a stock we'd rather own.
1. Core Business Falling Behind as Demand Declines
We can better understand Engineered Components and Systems companies by analyzing their organic revenue. This metric gives visibility into Gates Industrial Corporation’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Gates Industrial Corporation’s organic revenue averaged 2.3% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Gates Industrial Corporation might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Gates Industrial Corporation’s revenue to rise by 4.8%. Although this projection indicates its newer products and services will spur better top-line performance, it is still below average for the sector.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Gates Industrial Corporation historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 6.9%, somewhat low compared to the best industrials companies that consistently pump out 20%+.
Final Judgment
Gates Industrial Corporation isn’t a terrible business, but it isn’t one of our picks. With its shares outperforming the market lately, the stock trades at 16.8× forward P/E (or $25.59 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. We’d recommend looking at one of our top software and edge computing picks.
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